What Is Deferred Salary or Deferred Compensation?
The concept of deferred compensation entails withholding a portion of an employee's salary or compensation every month. This is done to a mass the amount over time and pay back the rounded-off amount to the employee on a fixed date, agreed upon previously, during his/her work tenure in an employment contract.
What Is a Deferred Compensation Plan?
The plan of deferred pay is the process that helps secure beneficial retirement, reduced tax rates and investment plans. For example, a person earning ₹800000 annually may defer ₹50000 yearly for the next 10 years.
What Are the Types of Deferred Compensation Plans?
The discussed compensation plan is broadly classified into the following types:
1. Qualified Deferred Compensation (QDC)
The Employee Retirement Income Security Act (ERISA) establishes laws governing this compensation category. Accordingly, these plans are strictly governed ones which are monitored and asserted under standardised rules and regulations.
It helps keep the saved amount of employees secured. However, this law does not allow the organisation to pay off debts to take the business out of a financial crisis. Furthermore, it restricts deferring a sum beyond a fixed limit.
2. Non-qualified Deferred Compensation (NQDC)
This alternative type incorporates no legal monitoring or control bonds. This plan does not restrict the amount a person decides to defer. Hence, this compensation category is for those who earn big and wish to defer considerably big amounts.
A person availing of this plan can assume a lower taxable income and enjoy tax-deferred investments and better returns. However, though the returns may be high, the option needs to be more secure. For example, an organisation may use these deferred amounts of its employees to pay off its incurred debts.
Employees cannot expect any actions to be taken upon reporting such an incident lacking a governing law over this plan.
What Are the Beneficial Factors to Consider for a Deferred Compensation Plan?
The following factors can be considered for a deferred wage or compensation plan:
- Tax Benefits: An early deduction of amounts from receivable salary reduces the salary and may make it taxed once the payee receives the amount. People who expect to fall under the lower income tax bracket in the future benefit from this scheme significantly. Furthermore, in case of a falling tax rate in the country, payees who avail of these compensation plans pay less tax eventually.
- Security After Retiring: It is a stable source of income for people who retire. These plans cater to providing financial stability to its beneficiaries. They can even invest their money in mutual funds or other options of investments, helping them earn money based on the interests received. In this process, the beneficiaries make notable capital gains.
How Does Deferred Compensation Plan Work?
An employer may provide a deferred salary or compensation plan by administering the above mentioned processes. Here is a small recapitulation of these:
- Pension plans
- Retirement plans
- Investment plans in mutual funds or stock markets
Properly implementing the deferred compensation plan extends empowerment to employees, assisting them in gaining ownership of their finances in future. Moreover, it even aids the employer-employee relationship, strengthening it and further contributing to building loyalty and engagement, establishing a more incredible positive company culture.