Nonqualified Deferred Compensation

Deferred compensation arrangements have been used by businesses to allow its employees and/or owners to defer the taxable income payable on account of their wages or other compensation. The deferral of income is beneficial because the tax liability is also deferred. Moreover, if the employee is in a lower tax bracket when the deferred amount is paid – which is likely, given that the deferred income could be paid after the employee has retired – the deferred amount could be subject to a lower tax rate.

Two provisions of the 1993 Tax Act make deferred compensation especially attractive to the corporate executive. First, the top individual income tax rate was increased from 31% to 39.6%. Second, beginning in 1994, qualified pension plan contributions can be based upon only $150,000 of income. Previously, a contribution could be based upon up to $235,840 of income.

Furthermore, because a deferred compensation arrangement is “nonqualified,” there are few IRS reporting requirements, making the deferred compensation arrangement attractive for businesses concerned about increasing its IRS reporting obligations.

Additionally, there are numerous ways the arrangements can be structured. However, if not properly structured, adverse tax consequences could result.

If you are interested in learning more about deferred compensation arrangements, whether you are a business owner or work for a corporation, please contact us to evaluate your particular situation.