What is a Deferred Compensation Plan?

Employee Deferred Compensation Account Plans

A Deferred Compensation Plan can be designed with many different designs.  The first, and most restrictive plan that a company can implement is a 100% employer funded plan that would have flexible vesting schedules,  can be 100% vested on day one or set up to only vest at death, retirement, or change of control or other triggering event.  And because these plans are employer paid, they have the ability to discriminate by participant or class, and can have different benefits levels that are:

  • formula based
  • performance based
  • incentive based, or
  • Based upon some combination of all of the above

From a funding stand point (i.e. putting money aside on the balance sheet), the employer may choose a market based product, a fixed interest product or even company stock.  Because of the volatility in the market in the last decade though, some of our employers have selected fixed interest account products that provide principal security and a steady interest rate return., or Indexed Products that have upside potential and downside “protection” to the assets.

The key behind these funding programs is that they will fluctuate based upon the design of the asset that the employer sets aside and the employer’s principal is only at risk based upon the underlying carrier that issued the product and the design of the product.  From a plan performance perspective, if the employer can limit its market risk by only offering a fixed interest account, the employer can limit its out of pocket cash flow while providing a very meaningful benefit to plan participants.  In many of these plans, the executives look at the benefits as their “fixed income account” of their retirement assets.

Types of Plans:

Employee 401K Mirror
Employer Plans
Employer SERP Plans
FAQs

Recommended Resource:

www.MyNQDC.com– Independent Overview of Non-Qualified Plans
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