On this blog, we often write about employment contracts and disputes related to those contracts, particularly in the areas of non-compete agreements, unpaid wages and overtime, and employee misclassification. While we tend to focus in on those specific areas on this blog, employment contracts encompass a wide variety of agreements, including employee benefits. One type of these benefits is a deferred compensation plan.
According to Businessweek, most executives eligible for what are termed "nonqualified deferred compensation plans," had until last Thursday-6 months prior to the end of their employer's fiscal year-to decide whether to participate in such plans offered by employers via their employee contracts. Nonqualified deferred compensation plans are a way for employees to save for retirement and for companies to attract and retain top tier professionals through offering employee benefits.
Employees who wished to participate in the plans were required to defer part of their bonuses and set aside some of their 2012 salary until the end of the year. Under IRS rules, salary deferrals are have to be selected prior to the beginning of each calendar year, and employees must select of future date for receiving the money, which may not be received early except in the case of some emergency.
Typically, executives who opt for deferred compensation plans defer for five or more years. Employers typically allow participating employees to select investments like mutual funds and company stock for their deferred compensation. Others offer fixed rates of return.
Executives eligible for the deferred compensation plans are able to choose each year whether they wish to contribute to the plan and how much. Roughly half of firms with over $1 billion in revenue match some of the employee's contribution to the plan. Equilar data shows that, in 2010, Fortune 100 CEOs contributed a median amount of $32,500 and companies matched a median amount of $95,813.
Deferred compensation plans allow participating employees to save up to 9 percent in future taxes, and to get around the $22,000 cap on 401(k) savings plan contributions which applies to lower paid employees.
In our next post, we'll continue looking at this topic of deferred compensation plans and why they are becoming more popular.
Source: Bloomberg Businessweek, "Deferred Compensation Lets Executives Avoid Caps on 401(k)s," Margaret Collins, 1 June 2011.