Benefits of deferred compensation arrangements

Deferred compensation arrangements are not subject to the same restrictions and requirements defined under the Internal Revenue Code for qualified plans. These arrangements may take on a variety of forms including nonqualified plans. A major distinction is the absence of any nondiscrimination requirements or testing. Consequently, there are no requirements for employers offering deferred compensation arrangements to broadly cover rank and file employees under any such plans. Instead, employers may choose at their discretion to focus on providing benefits to key employees or executives. Deferred compensation arrangements may allow employers to offer increased wage replacement ratios in retirement to employees or executives with income beyond the covered compensation limit in comparison to qualified plans, defer compensation and corresponding employee / executive income tax liability until a future date, and / or offer retirement benefits to employees / executives without implementing a qualified plan. Common arrangements include “golden handshakes” (compensation upon retirement), “golden handcuffs” (compensation for continued service and loyalty), and “golden parachutes” (compensation upon termination).