What is Deferred compensation?

Whether you're a beginner or an expert, you will find this Glossary useful.

Deferred compensation refers to a portion of salary or compensation which is paid to an employee at a later date.

Differed compensation definition

Deferred compensation refers to a portion of salary or compensation which is paid to an employee at a later date. It means that part of the compensation is postponed for a certain time.

This is usually done in order to defer tax to a future date when the rate is lower.

Types of deferred compensation

1. NDCP, Nonqualified Deferred Compensation Plans - when the employee gets paid on a pre-specified date in the future for the work he/she has done in the present. The payment usually happens at the time of termination of employment, death or disability.

2. Qualifying Deferred Compensation - includes plans for public education employers, non-government organizations, non-profit organizations, state and local government organizations.

Deferred compensation examples

1. Retirement plan - what is given to the employee once he/she retires from their services with the company

2. Pension - what is paid once an employee retires

3. Employee stock option – what is given to employees as a part of their compensation

All these examples deduct a proportionate monthly/quarterly/yearly premium from the employee’s income which is not covered under tax deductible income for the current month/quarter/year.



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