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Offering a Deferred Compensation Plan to Retain Employees

Often one of the most difficult factors in maintaining your business is retaining employees. You need faithful workers to handle the day-to-day activities, but it can be difficult to keep them on the payroll. One option that some companies might consider is a deferred compensation plan. An experienced business law attorney will help you with drafting and executing an agreement that works.

What is a Deferred Compensation Plan?

A deferred compensation plan allows an employer to set aside a portion of an employee’s compensation to be paid at a later date or in another form. A deferred compensation plan gives an incentive to employees to keep them on the payroll. Generally, the benefit to the employee is that they will gain some additional compensation on which they will not immediately need to pay taxes.

The deferred compensation plan can be offered in various forms such as:

  • stock options
  • retirement or pension plans

The employer can offer a deferred compensation package to current employees or to potential new hires as a way to entice them to accept the position.

Rules of Deferred Compensation Plans

Deferred compensation plans can be beneficial to both employers and employees, but only as long as they follow the applicable laws. Unlike typical 401K plans, deferred compensation plans do not have contribution limits. This makes them desirable, particularly to high-income employees. An employee could retire at a lower income level and therefore take better advantage of the lower tax bracket.  However, tax deferred plans can be considered less stable than standard 401K plans. It may be riskier for employees to accept deferred compensation since they could end up without their benefits should the company go bankrupt.

What to Know About Implementing Deferred Compensation Plans

If you want to implement deferred compensation plans, there are several things to keep in mind:

  • Always make the plan in writing so it is as clear as possible. An employee could challenge a verbal agreement or a plan that is not well written.
  • Be sure to address the way that compensation will be provided as well as when the employee is eligible to receive it. Once you designate a distribution date it cannot be changed. Therefore, you should always be cautious when drafting a plan.

It is important to note that deferred compensation plans cannot be rolled into a standard retirement plan. Be sure to discuss the plan with your employees so they can obtain advice before they agree.

Deferred compensation plans do offer some benefits to employers, but they can be somewhat complex. Seek legal guidance to draft and implement any deferred compensation plan for your business. To learn more about deferred compensation plans and to get answers to your legal business questions, contact our business law attorneys at Moen Sheehan Meyer, Ltd. at (608) 784-8310 or online via email.

Published July 11, 2022
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