Adcock Financial Group

At Adcock Financial Group, our clients come first. As your fiduciary, we act on your behalf with a duty to preserve good faith and trust. We always put the needs of our clients ahead of our own. We strive to provide the highest level of service in every client interaction. We are passionate about client education, arming our clients with the tools they need to make informed decisions regarding their personal and business finances. Meet with one of our experienced financial services representatives to determine what we can do for you and your business.

What is Deferred Compensation?

Deferred compensation is a part of an employee’s compensation or wages set aside to be paid out to them later. In many cases, taxes are deferred until funds are paid out. A deferred compensation plan is beneficial when one can reduce present and future taxes by deferring income. The withheld amount of income is paid out to the employee at a specified date, usually at retirement.

What is the difference between Deferred Compensation and a 401(k)?

Deferred compensation plans are funded informally. Essentially, they are a promise by the employer to the employee to pay the funds deferred at a later specified date plus any investment earnings. However, a 401(k) is more formal and includes an established account by which the employee elects a specific contribution, and sometimes the employer matches a portion thereof.

Who is eligible for Deferred Compensation?

Employers typically offer deferred compensation plans to retain key employees and executives. Deferred compensation can be qualified or non-qualified. Deferred compensation’s benefit depends upon the individual’s tax situation. A deferred compensation plan is most beneficial when you can reduce present and future tax rates by deferring your income.

Examples of Deferred Compensation

• Retirement Plans – Retirement plans include plans such as 401(k)s and IRAs. There are several benefits to utilizing multiple vehicles for retirement planning.
• Pension Plans – A pension plan is a retirement plan that requires a contribution to a pool of funds set aside for an employee’s future benefit.
• Stock-Option Plans – With an employee stock option plan, you are offered the right to purchase a specified number of company shares at a specified price.
• Qualified vs. Non-Qualified – Qualified retirement plans such as 401(k), 403(b), and 457 plans can be offered to employees and are generally taxed when the contribution is made to the account. A non-qualified plan, such as a 409(a) plan, can be offered to executives or key employees. These have no limits on contributions and allow the company to postpone payment of some earnings while providing an alternative way to save for retirement. A 409(a) can be especially attractive to a key executive or key employee who has already put into place measures to maximize contributions to other retirement savings vehicles.

Supplemental Executive Retirement Plan

A Supplemental Executive Retirement Plan or SERP is an example of a deferred compensation plan aimed at key executives of organizations. A SERP mirrors defined-benefit plans in that they guarantee a set amount at sign-up, which you will receive at retirement. Some common ways of determining and calculating the amount of a SERP include coming up with a flat dollar amount for a specified number of years of service to the company agreed upon at hiring. This can also be determined by using a percentage of an executive’s salary. The plan can be structured for funding by a cash value life insurance policy to pay out to your beneficiaries if you die unexpectedly.

Key Takeaways

It is important to note that deferred compensation is not always beneficial to every key employee or executive. However, these plans are targeted at such employees because, in many cases, they are an attractive incentive to retain key employees and key executives. A financial professional at Adcock Financial Group can help determine what these plans look like for your organization and how to maximize this incentive for your particular key employees and executives. There are several plans available and many ways to put these plans in place in your organization.