The Strategic Role of Deferred Compensation as an Employees Benefit

A primary goal of every business is to attract and retain great employees. At times, this is easier said than done. However, by incorporating the right mix of benefits for your employees and implementing an effective internal communications strategy to showcase these benefits, you can make this just as easy to do as it is to say. 

One creative strategy is to offer deferred compensation as part of your company’s overall benefits structure and to effectively communicate deferred compensation with total rewards statements that can be updated and generated at strategic intervals to consistently highlight the value to recipients. Deferred compensation plans are usually categorized as qualified or non-qualified plans. Each type serves a distinct purpose as part of an employee’s retirement strategy.

Understanding Qualified Deferred Compensation Plans

Your company can offer employees a variety of qualified deferred compensation plans. Qualified plans are those subject to the rules and regulations of the Employee Retirement Income Security Act. Some of the more familiar plans in this category are the following:

  • A 401(k) is a private sector retirement plan for businesses and their employees to opt into. A traditional 401(k) allows employee pretax contributions with taxed withdrawals, while a Roth 401(k) allows tax-free withdrawals only. Employers can match employee contributions to both.
  • A 403(b) is a retirement plan for employees of public schools and tax-exempt organizations such as government, hospitals, or other nonprofits. Similar in structure to the 401(k), the traditional 403(b) allows employee pretax contributions with taxable withdrawals and the Roth 403(b) permits tax-free withdrawals only. Both the traditional and Roth permit matching employer contributions.
  • Profit-Sharing is a unique retirement plan funded solely by employer contributions. These allocations can be adjusted at the employer’s discretion, perhaps resulting in zero contributions to the plan in some years and varied amounts in others.

Understanding Non-Qualified Deferred Compensation Plans

You can make your organization even more attractive to key employees by adding non-qualified deferred compensation plans into the benefits mix. A non-qualified plan is also known as 409(a) plan. Generally reserved for higher compensated employees, this plan is a bit trickier to implement, but allows for even greater amounts of taxable income to be deferred until a later tax year. The taxable income categories for this type of plan are diverse but include things such as supplemental executive retirement plans, commissions, bonuses, and stock options among others.

Non-qualified plans carry a more inherent risk for employees than qualified plans since they are not subject to the protective standards of the Employee Retirement Income Security Act. As with many investments, greater risk can result in a greater reward. This is true of non-qualified plans. However, much of the value of this plan is inextricably linked to company performance and financial strength. If the company takes a financial hit, so does the plan.

Communicating the Value of Deferred Compensation to Employees

It’s good to have something. It’s even better to understand what you have. This is especially true when it comes to your employee compensation and total benefits. Rewards motivate your employees when the value of the rewards are understood in proper context. The primary value of a deferred compensation package is that, in most cases, pre-tax income is invested and grows tax-free until withdrawal. This is powerful.

Your communication strategy for this benefit should be just as powerful as the benefit itself. A Total Rewards Statement is the medium designed to communicate that reality with impact. This document helps employees understand and appreciate the value of deferred compensation in conjunction with the sum of all additional benefits due to them.

You can make your business more attractive to highly skilled employees by strategically offering and communicating just a few key incentives designed to motivate, mature, and retain your greatest asset – people.

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