Deferred Compensation Plans and the Tax Code

Does your business offer a deferred compensation plan?  Do any of your employment agreements inadvertently create a deferred compensation plan?

If your business offers a deferred compensation plan or you are the employee receiving that benefit, you need to be aware of a potentially devastating tax hit for plans that are not in compliance with the tax code.

Deferred compensation is compensation earned in one year and paid to the recipient in some future year.  Deferred compensation plans are a benefit provided to an employee to secure some level of future income and may be in the form of stock options, retirement plans or some other financial arrangement.

Any compensation paid pursuant to a deferred compensation plan not meeting certain qualifications subjects the employee receiving the compensation to an additional 20% tax.  Further, the employee will be charged interest on the amount of income tax that should have been paid in the taxable year in which the deferred compensation was earned.  This could become very expensive!

The rule is detailed and specific in setting out the provisions that must be included in order to avoid this painful tax penalty.  Any problems with the wording and application of your plan can be corrected, whether it is a plan specific to one employee or one that applies to all employees within a company.

Please contact us so that we can review your employment agreements and/or compensation plan to ensure compliance with this new requirement and help you create an effective solution.