Outten & Golden attorneys review and negotiate employment agreements and separation agreements that include deferred compensation arrangements. When an employer refuses to comply with the terms of the relevant plan, our attorneys litigate and arbitrate the disputes. In addition, our attorneys can intercede on behalf of an employee who may have additional rights under ERISA when an employer misclassifies a qualified deferred compensation plan as a non-qualified plan.
Deferred compensation is income that is earned in one year but paid out in a later year. Deferred compensation plans are financial arrangements, usually between an employer and employee, in which a portion of an employee's earned income is withheld and paid out at a specified future time. These plans provide employees with future financial income as well as a tax deferral, since the withheld income usually is not taxed until the date it is received. The deferred income also collects interest before it is taxed.
There are two kinds of deferred compensation plans: qualified plans and non-qualified plans. Qualified plans are regulated by ERISA, while non-qualified plans (“non” qualified because they are outside the scope of ERISA plan regulations) are regulated by Internal Revenue Code section 409A. Qualified plans, like 401(k)s and IRAs, generally set aside money to be paid to employees in retirement. Absent special circumstances, employees cannot access qualified deferred compensation before retirement age without incurring a substantial penalty.
Non-qualified deferred compensation plans usually are offered only to a select group of high-level employees who, although constrained by a future date(s) stated in the plan, may access the deferred funds before retirement. These plans are not limited in the amount or type of compensation that can be deferred. They include executive bonus plans, group carve-out plans and split-dollar life insurance plans, and often involve investment of the deferred amount by the employer on the employee’s behalf. Deferred compensation plans provide an incentive for employees to remain employed by the company providing the plan since employees may risk forfeiting unvested deferred compensation if they change employers. Employees that participate in these plans, however, also risk losing money on the investment.