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Deferred compensation plan participation increases, P.2

In our previous post, we began discussing deferred compensation plans. We noted that eligible employees choosing to participate in those plans were required to set aside some of their future earnings by last Thursday, the 6 month mark until the end of the fiscal year.

According to a recent Business week article, deferred compensation plans offered in employment contracts are becoming more popular for executives and other highly paid employees. As economic struggles continue, more executives are turning to deferred compensation plans for extra financial security.

According to Equilar-an executive compensation data firm in Redwood City, California-around 79 percent of chief executive officers at Fortune 100 companies were offered the chance to participate in the plans. Executive participation in deferred compensation plans rose from 40 to 42 percent in 2011.

Many experts believe the reason for the increased participation was an anticipation of greater bonuses as well as increased confidence in the economic health of employees' firms. Another reason, though, is the tax savings involved in opting for such a plan, coupled with expectations of tax increases on the horizon.

With the struggling economy, many states are choosing to increase taxes in the coming year, and many expect states to continue raising taxes, particularly if Democrats continue to occupy the White House. If that happens, deferred compensation will continue to become an increasingly attractive option for many highly paid employees.

One of the factors executives have taken into consideration regarding the deferred compensation plans is that they may save a lot of money if they move from a state with high income tax to a state with no income tax. According to federal law, a taxpayer who earns deferred compensation in one state cannot be taxed by another state to which they move if the money is received in equal installment payments over a minimum period of 10 years.

Deferred compensation plans, while attractive on many levels, are not without risk. According to sources, the primary risk for executives participating in nonqualified plans is that their employer may go bankrupt, since participants in those plans are considered unsecured creditors.

Source: Bloomberg Businessweek, "Deferred Compensation Lets Executives Avoid Caps on 401(k)s," Margaret Collins, 1 June 2011.

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