Deferred Compensation Plan Law and Legal Definition

A deferred compensation plan is an employee benefit plan, authorized by various Internal Revenue Code Sections, under which employees may contribute a percentage of wages to tax deferred savings plans rather than receive the amounts as current compensation. The most commonly used deferred compensation plan is the 401(k) plan.

Employee contributions to 401(k) plans are exempt from federal income tax and, in some states, state income tax, withholding but are not exempt from FICA withholding. Employer contributions, made on behalf of the employee, are also exempt from federal income tax withholding. Contributions and earnings on 401 (k) accumulate tax free until distributed to the employee at retirement.

There is a limit applicable to the amount which may be contributed to such plans, which ar adjusted annually for inflation. Deferred compensation plans have strict requirements as to eligibility, participation, vesting, nondiscrimination, withdrawal of funds, and annual reporting.