A deferred compensation plan that can favor key employees. (tax benefits derived from deferred compensation)(Tax-Savings Strategies) (column)

A Deferred Compensation Plan That Can Favor Key Employees

Deferred compensation is future payment for services performed now. When payments are structured to IRS specifications, the employer gets an immediate deduction and the employee pays no tax until he or she withdraws the funds.

To qualify for these tax breaks, your plan must meet the requirements of the Employee Retirement Income Security Act (ERISA). It can't discriminate among eligible employees in favor of officers, owners and highly paid employees. You must set up a trust; and you must satisfy strict rules on vesting, funding, fiduciary responsibilities, termination insurance, and annual reporting.

But suppose it's too costly to include rank-and-file workers. Or you need an incentive to attract or keep certain executives. Or you don't have the funds now but expect them in the future.

The solution: a nonqualified deferred compensation plan.

Advantages of a Nonqualified Plan

It's called "nonqualified" because it doesn't qualify for the above tax breaks. But it has its own advantages. You can tailor benefits for just one person or a select group of executives or highly paid employees without worrying about discrimination rules. You can fund it as you go …