what is a deferred compensation plan

A deferred compensation plan is an arrangement in which a portion of an employees income is paid out at a later date after which the income was earned. It is a written agreement between an employer and an employee where the employee voluntarily agrees to have part of their compensation withheld by the company, invested on their behalf, and given to them at some pre-specified point in the future. Examples of deferred compensation plans include pensions, 401(k) retirement plans, and employee stock options. Deferred compensation plans are essentially an IOU from the employer to the employee, and the lump sum owed to an employee in this type of plan is paid out on a specified date, usually retirement. Some deferred compensation plans allow participants to schedule distributions based on a specific date, which is called an in-service withdrawal. Deferred compensation plans are available mainly to high-income earners, and they are an incentive that employers use to hold onto key employees. They can be structured as either qualified or non-qualified under federal regulations, and some deferred compensation is made available only to top executives. Deferred compensation plans can be a great savings vehicle, especially for employees who are maximizing their 401(k) contributions and have additional savings for investment, but they also come with lots of strings attached.