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An executive deferred compensation plan allows employers to defer a part of their executives' income so that they will pay taxes on it later when they start withdrawing from it.
Deferred compensation plans are available mainly to high-income earners who want to put away funds for retirement and find the company 401(k) plan inadequate to their needs. Unlike 401(k)s or individual retirement accounts (IRAs), there are no contribution limits to a deferred compensation plan.
A 401(k) plan is a qualified deferred compensation plan. If you're eligible under the plan, you generally can elect to have your employer contribute a portion of your compensation to the plan on a pretax basis.
A ?section 457 plan? is a deferred compensation plan that is maintained by an eligible employer and that complies with the specific requirements set out in IRC Section 457(b).
A deferred compensation plan withholds a portion of an employee's pay until a specified date, usually retirement. The lump sum owed to an employee in this type of plan is paid out on that date. Examples of deferred compensation plans include pensions, 401(k) retirement plans, and employee stock options.
Put the plan in writing: Think of it as a contract with your employee. Be sure to include the deferred amount and when your business will pay it. Decide on the timing: You'll need to choose the events that trigger when your business will pay an employee's deferred income.