Employee Voluntary Deferrals (401K Mirror)
When an Employee talks about “Deferred Compensation”, it usually means that they want to “defer” income that they otherwise has earned. The employee would make an election to defer income into a plan that looks, smells and “feels” like a 401K plan (A 401K Mirror Plan). The employee could electively defer base compensation, a bonus, or both. That election would be made with a minimum deferral of at least three months or more. And instead of being paid that money, it would go into an account on the balance sheet at the employer which is a LIABILITY equal to the amount deferred (plus/minus earnings), payable at a pre-determined date.
While the employer loses the current deduction for the salary that would have otherwise been paid, the employer will get this deduction in the future. The employee is 100% vested in his/her deferral account and the employer has the option to make a matching contribution at its discretion.
Because of the rules governing the ability to defer income, i.e. Section 409A IRC, the employer and employee must follow very strict rules and guidelines to avoid current taxation as well as potential penalties. As part of these programs the employer creates an agreement to pay income to the employee, acrrue the liability plus the interest on that liability each year, and the money that the employee defers remains an asset of the company to do with as the employer sees fit.
In most arrangements, the employer may offer the employee a fixed interest rate, a rate or return equal to the performance of the company, or the ability to invest in a shadow account such as a mutual fund.
The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding and Federal Tax penalties. Schiff Benefits Group, its employees and representative are not authorized to give tax or legal advice. Individuals are encouraged to seek advice from their own tax or legal counsel.