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This question is about salaries.
What is salary deferral?
Salary deferral is a type of employer-sponsored non-qualified deferred compensation plan that is available for highly compensated executives. Under a salary deferral plan, a key executive agrees to defer a portion of their compensation, and the employer agrees to return the deferred amounts with interest in the future.
A salary deferral plan means the employee is allowed to defer as much income or compensation as the plan permits, and the plan is not subject to qualified plan limits or caps. Employees typically participate in these types of plans when their current income substantially exceeds their current needs.
Elective deferred compensation is designed to be a supplemental benefit that allows employees to accumulate wealth for retirement with tax-deferred savings in excess of their qualified plan contributions. The employer will agree to repay the money with interest at a specified time (usually retirement).
The employer will decide how the interest will be credited to the employee's deferral account and what options if any, to offer. For example, the employee may be given phantom investment options with results applied to the deferral account.
The employer may also choose to informally fund the plan with a life insurance policy owned by the business on the employee's life. At retirement, the employer can access the life insurance policy cash value via tax-free loans and withdrawals to pay the retirement benefit.
At the time the benefit is paid, it will become taxable income to the employee and tax-deductible to the employer.
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