Nonqualified Plans • Deferred Compensation • Plan Types • Tax Treatment • Rabbi & Secular Trusts • SERPs
Deferred Compensation
A deferred compensation plan is defined by three key elements: a promise to pay benefits, the forfeitability of those promised benefits, and a method to fund them. Unlike qualified plans, deferred compensation arrangements are not subject to ERISA nondiscrimination rules and may selectively benefit key executives.
Common plan types include Excess Benefit Plans (for executives maxed out under qualified plans), Top Hat Plans (salary deferral arrangements funded with the executive’s own money), and SERPs (Supplemental Executive Retirement Plans, funded by the employer). Plans may be informally funded through corporate-owned life insurance. Rabbi trusts provide some security but assets remain subject to employer creditors; secular trusts protect assets from creditors but trigger immediate taxation. Salary continuation plans are the classic “golden handcuffs” tool for executive retention.