Deferred compensation is an important tool used to retain executives, highly-compensated employees and other key employees. These plans offer employers and employees almost unlimited flexibility in designing and structuring a plan to accomplish any number of objectives. Principal among these objectives is to permit employees to defer tax on amounts contributed into these plans until they are actually received.

Deferred compensation plans are not subject to the stringent rules applicable to "qualified" retirement plans. As a result, deferred compensation can be used to provide benefits to specific groups of employees or particular individuals.

Until recently, the only real limitations on deferred compensation plans were those exempting the plans from ERISA and those relating to "constructive receipt". In the past several years, however, these plans have come under greater scrutiny by both the IRS and the SEC, through the enactment of section 409A of the Internal Revenue Code and the adoption of stringent new compensation disclosure rules for public companies by the SEC.

Despite these changes, deferred compensation remains an invaluable tool for employers to attract and retain executives and other key employees.

Types of Deferred Compensation

For-profit employers have a great deal of flexibility in providing deferred compensation for their directors and officers, key executives and employees.

These types of deferred compensation arrangements can take many forms, including:

Cash Plans

• Salary and bonus deferral plans;

• Short term incentive or bonus compensation;

• Long-term incentive compensation;

• Supplemental Executive Retirement Plans ("SERPs");

• Excess Benefit Plans;

• Shadow or tandem 401(k) plans;

Equity Plans

• Restricted and unrestricted stock grants for cash, services or past services;

• Phantom Stock

• Qualified Stock Options:

  1. Incentive Stock Options ("ISOs")

  2. Employee Stock Purchase Plans ("ESPPs")

• Nonqualified Stock Options ("NQSOs")

• Stock or capital appreciation plans

• Discounted Property Plans

  1. Stock appreciation rights ("SARs");

  2. Restricted Stock Units ("RSUs");

• Employee Stock Ownership Plans ("ESOPs");

• Stock Bonus Plans

Other

• Shadow equity;

• Discounted options to purchase property; or

• Other equity compensation (i.e., partnership or LLC profits and capital interests).

Some of these forms of compensation, such as current cash or bonus plans, ESOPs and ESPPs, are not deferred compensation plans.