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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