Portion of earned Income that is paid to the employee at a later date is named as Deferred Compensation. This is usually practiced to defer tax to a future date when the rate is lower.
Examples:
-Retirement plan
-Pension
-Employee stock option
All these above mentioned plans deduct a proportionate monthly/quarterly/yearly premium from the employee’s income and the portion is not covered under tax deductible income for the current month/quarter/year. A relatively lesser tax bracket covers these plans which are introduced whenever the plan matures. Pre matured disbursement of these plans are penalized as per the tax norms
Types of Deferred Compensation:
– Non qualified Deferred Compensation Plans (NDCP): NDCP generally means that the employee would be paid on a pre-specified date in the future for the work he has done in the present. The payment usually happens at the time of termination of employment, death or disability. NDCPs are geared to defer the taxation to the time when the employee is in a lower tax bracket
– Qualifying Deferred Compensation: Qualifying Deferred Compensation plans include plans for public education employers, non-government organizations, non-profit organizations, state and local government organizations.
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