Pros and cons of deferred compensation plans

| Oct 26, 2017 | blog |

To attract top talent more mid-size companies have started offering deferred compensation plan to CEOs, COOs and directors. Individual circumstances and future goals will influence whether to defer or not.

Compensation and benefits are significant terms in an offer package, but they are not the only ones. Seeking counsel from an experienced employment attorney on the front end can also ensure a non-compete clause tucked away on page four of a contract does not limit future career moves.

Pros: Deferred compensation plans can fill a gap

These plans allow you to set aside part of your salary or bonus – and your employer provides an i.o.u. that they will pay you down the road. Your money grows tax-deferred. Some use these plans as part of a strategy to retire earlier and delay taking other retirement distributions and Social Security.

Why use a deferred compensation plan? The maximum employee contribution for an employer-provided 401(k) is $18,500 in 2018. If you are over age 50, you can add an extra $6,000. For highly compensated professionals this cap may not be high enough to save for the future.

In addition to potential tax savings by pushing payments into lower income years, these plans can be helpful if you have college-aged children or are facing the potential of litigation or divorce.

Cons: Lost funds or large disbursements

You need to understand that protections that exist for money saved in a 401(k) accounts, do not exist for deferred compensation plans. If an employer files for bankruptcy down the road, you would be an unsecured creditor and might not get your money back. And stricter payout rules went into effect after Enron (where the company accelerated payouts right before a bankruptcy to protect some executives to the disadvantage of other creditors).

Another potential risk is an acquisition by a company that does not offer deferred compensation plans. This could lead to a significant disbursement in one year taxed at the top marginal rate.

Once you decide how much to defer and when you would like to receive the payout, there often is not a lot of wiggle room to change the plan. For this reason alone, it is crucial to sit down with a skilled attorney to talk through your situation.

Decisions about whether to utilize deferred compensation plans must also take into account stock options and compensation. Diversifying the sources of income is a way to limit exposure to one company.

Whether you are accepting a new position or beginning the search for the next opportunity, seek legal advice to smooth any transition. Getting counsel during the process can often avoid litigation down the road.

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