--- title: Deferred Compensation: A Comprehensive Guide --- # Deferred Compensation: A Comprehensive Guide Last Reviewed: March 18, 2026 6 min read [No comments](https://www.selecthub.com/compensation-management/deferred-compensation/?noamp=mobile#respond) [ ![Urnesha Bhattacharjee](https://www.selecthub.com/wp-content/uploads/2023/11/cropped-cropped-Urnesha-Headshot-2_Meet-the-Team-96x96.jpg) ](https://www.selecthub.com/author/urnesha-bhattacharjee/) [Written by Urnesha Bhattacharjee](https://www.selecthub.com/author/urnesha-bhattacharjee/) Technical Content Writer [ ![Hunter Lowe](https://www.selecthub.com/wp-content/uploads/2023/11/cropped-Hunter-Headshot-96x96.jpg) ](https://www.selecthub.com/author/hunter-lowe/) [Edited by Hunter Lowe](https://www.selecthub.com/author/hunter-lowe/) Content Editor Table of Contents * [What Is Deferred Compensation in HR?](#What%5FIs%5FDeferred%5FCompensation%5Fin%5FHR "What Is Deferred Compensation in HR?") * [Types](#Types "Types") * [Qualified](#Qualified "Qualified") * [Non-Qualified](#Non-Qualified "Non-Qualified") * [Taxation and Accounting](#Taxation%5Fand%5FAccounting "Taxation and Accounting") * [How To Implement](#How%5FTo%5FImplement "How To Implement") * [1\. Maintain Transparency](#1%5FMaintain%5FTransparency "1. Maintain Transparency") * [2\. Offer Learning Opportunities](#2%5FOffer%5FLearning%5FOpportunities "2. Offer Learning Opportunities") * [3\. Deploy Software](#3%5FDeploy%5FSoftware "3. Deploy Software") * [HR’s Role in Designing Deferred Plans](#HRs%5FRole%5Fin%5FDesigning%5FDeferred%5FPlans "HR’s Role in Designing Deferred Plans") * [Financing Deferred Compensation Plans](#Financing%5FDeferred%5FCompensation%5FPlans "Financing Deferred Compensation Plans") * [Next Steps](#Next%5FSteps "Next Steps") The HR world is flush with [compensation management](https://www.selecthub.com/category/hris/compensation-management/) plans to reimburse employees for their work. Today, the hiring landscape is evolving with newer and smarter strategies for wealth maximization. Offering deferred compensation is a surefire way to ensure employees retire with comfortable savings. This article talks about this compensation model from the employer’s point of view. You’ll find answers to questions like, what is deferred compensation? Why should you offer it? How do you fund it? What are the tax implications, and how can you use [compensation planning tools](https://www.selecthub.com/hris/compensation-management/compensation-planning-analysis-tools-use/) to design plans? [Compare Top Compensation Management Software Leaders](https://pmo.selecthub.com/request-custom-scorecard/?category=Compensation%20Management%20Software) ![Deferred Compensation Guide]() ## What Is Deferred Compensation in HR? Deferred compensation is a payment model in which a portion of an employee’s salary pays out later. The amount remains tax-exempt for the duration of the plan. Employees receive the accumulated sum on a predetermined date in the future or at retirement. Companies offer deferred compensation options in addition to 401K plans to retain and motivate employees. Deferred payment schemes take on many forms: * Mutual funds * Contingency plans * Insurance schemes * Stock options * Retirement support * Pension plans ## Types The two types of deferred compensation differ significantly in their legalities and purposes from the employer’s point of view. ![Types of Deferred Compensation]() ### Qualified The [Employee Retirement Income Security Act](https://www.investopedia.com/terms/e/erisa.asp) (ERISA) is a set of federal laws that protect retirement assets. 401(k) and 403(b) are some common plans under it. The ERISA regulates qualified deferred compensation plans. Companies offering a 401(k) must offer it to all employees. The government caps the contribution amount to qualified plans. Federal laws also regulate how a company must fund these plans. The ERISA protects employees who opt for qualified plans in cases of organizational dispute, bankruptcy or insolvency. Even in such contingencies, the retired individual receives the accumulated funds. ### Non-Qualified Employees who like to take a riskier step into the savings game can opt for non-qualified deferred compensation plans (NQDC). It’s a high-risk, high-reward situation: the ERISA doesn’t protect these plans, but there are no annual contribution limits, and independent contractors are also eligible. HR offers NQDCs to high-demand employees they want to retain. In some cases, people accept NQDC plans in place of their full compensation right away. Though NQDCs allow employees to save on taxes for a greater portion of their salaries, creditors can seize these funds if the company ever goes bankrupt. [Compare Top Compensation Management Software Leaders](https://pmo.selecthub.com/request-custom-scorecard/?category=Compensation%20Management%20Software) ## Taxation and Accounting Filing deferred compensation taxes is a baffling task. You’re essentially filing thousands of dollars away to fit tax brackets and regulations of the future. HR professionals typically delegate this to specialized handlers or tax management solutions. Deferred compensation is often subject to Social Insurance taxes at the time of deferral. If employees are required to undertake future benefits to collect their deferred pay in an NQDC plan, FICA tax isn’t due until the stipulated service ends. Employers are subject to numerous deferral laws and restrictions depending on how the plan is set up. Sloppy handling of deferred taxes may invite IRS penalties. When an employee contributes a percentage of their pay to a non-qualified plan, you owe them money in the future. Accounts payable is the word for the amount you owe them but haven’t paid. Accounts payable are a sort of debt or liability. Credits increase the liabilities of a firm. To preserve accurate accounting records, you must credit your accounts payable with the amount of deferred compensation. This method establishes proof that you still owe the employee money. ## How To Implement A sturdy compensation policy is a telltale sign of a thriving company culture. Deferred compensation is a niche retention strategy that, if done well, empowers employees to take charge of their financial future. ![Implementing Deferred Compensation]() It fosters an enduring relationship between the employer and the employee, resulting in increased engagement, motivation, loyalty and a positive work environment. Here are a few ways to implement a plan seamlessly. ### 1\. Maintain Transparency HR leaders can provide individually crafted documents for each employee and their needs instead of providing a blanket summary of deferred pay. It’s easier to provide the right information to each employee by [segmenting staff](https://www.linkedin.com/pulse/evp-employee-segmentation-days-one-size-fits-all-over-gonzalo) according to age, pay and experience. ### 2\. Offer Learning Opportunities Encourage employee participation in compensation planning by using a variety of training strategies. For instance, engaging a specialist is best when making crucial tax or income planning decisions. Interactive media may produce better results when explaining deferred pay to employees in general. ### 3\. Deploy Software Compensation software is a boon for HR managers that deal with planning and taxation for deferred compensation plans. Here’s why: Deploying software can help you stick to the organizational compensation plan while designing deferred pay. Compensation management tools ensure compliance with tax regulations on all legislative levels. They structure deferred plans that check out during IRS audits and establish compliance with [FLSA](https://webapps.dol.gov/elaws/whd/flsa/screen5.asp) and other laws. All in all, compensation management software helps secure the financial well-being of both employers and employees. ## HR’s Role in Designing Deferred Plans A [study](https://secure02.principal.com/publicvsupply/GetFile?fm=BB12491&ty=VOP&EXT=.VOP) by the Principal finds the answers to the “why” and “how” of HRs offering deferred salaries. * 66% of employers use deferred compensation plans to retain excelling employees, while 59% use them to recruit top talent. * Post recruitment, 88% of employers offer deferred compensation to help employees save for retirement beyond qualified plans. * In 2022, only 24% of deferred compensation plans were employer funded. 76% were financed by employees and employers together. ![Deferred Compensation Statistic]() ### Financing Deferred Compensation Plans What’s the best way to fund deferred compensation from an organizational perspective? Here are your options. Companies can use cash flow to pay for agreed-upon benefits of a non-qualified deferred compensation plan. However, purchasing [company-owned cash value life](https://www.investopedia.com/terms/c/coli.asp) (COLI) or [short-term disability insurance](https://www.adp.com/resources/articles-and-insights/articles/s/short-term-disability.aspx) (COSDI) for each member is a more stable financing strategy. For each insurance policy, the corporation remains the owner, premium payer and beneficiary. Insurance premiums are paid by pay deferrals and/or employer contributions. Policy cash values grow tax-free and can be retrieved through loans or withdrawals to pay plan benefits when the employee retires. [Compare Top Compensation Management Software Leaders](https://pmo.selecthub.com/request-custom-scorecard/?category=Compensation%20Management%20Software) ## Next Steps Besides being a retention tactic, deferred compensation tells your employees that you care about their retired life and investment plans. Well-thought-out HR practices reflect positive company culture. In addition to 401 (k) plans, deferred payment is a great way to help employees maximize their wealth. Maintaining transparency about the risks involved in subscribing to non-qualified plans is of prime importance. Compensation software can help you design tax-compliant deferred payment plans that help your employees save up in the long haul. Our [free comparison report](https://pmo.selecthub.com/request-custom-scorecard/?category=Compensation%20Management%20Software) includes in-depth product reviews to help you choose the right solution. Are you using compensation software to design deferred compensation plans? Why/why not? Let us know in the comments. ### Trending Topics #### [Compensation Management](https://www.selecthub.com/category/compensation-management/) [The Best Compensation Planning And Analysis Tools Of 2026](https://www.selecthub.com/compensation-management/compensation-planning-analysis-tools-use/) [Compensation strategies that entice employees to stay at the company are more important than ever.… ](https://www.selecthub.com/compensation-management/compensation-planning-analysis-tools-use/) [ ![SelectHub](https://www.selecthub.com/wp-content/uploads/2023/10/cropped-selecthub_logo-96x96.jpg) SelectHub ](https://www.selecthub.com/author/selecthub/) Aug 06, 2024 Originally published in August 2024 and last updated in March 2026\. Contributions from Urnesha Bhattacharjee, and Hunter Lowe. ## About the Contributors The following team members helped research, create, and review this content. [ ](https://www.selecthub.com/author/urnesha-bhattacharjee/) Written by [Urnesha Bhattacharjee](https://www.selecthub.com/author/urnesha-bhattacharjee/) Technical Content Writer Urnesha is a former Technical Content Writer at SelectHub, covering supply chain management, TMS, and compensation management. She has worked in content writing, editorship, and translation for the last 7 years. Her dream is to be a lifelong learner and venture out of her comfort zone as she does so. She's passionate about access to quality education, animal rights, and sustainability, among other things. She holds a Master's degree in English literature from the University of Hyderabad. Outside of work, you can find her listening to The Beatles, making memes, or volunteering at an animal NGO. [See Full Bio](https://www.selecthub.com/author/urnesha-bhattacharjee/) [ ](https://www.selecthub.com/author/hunter-lowe/) Edited by [Hunter Lowe](https://www.selecthub.com/author/hunter-lowe/) Content Editor Hunter Lowe is a Content Editor, Writer and Market Analyst at SelectHub. His team covers categories that range from ERP and business intelligence to transportation and supply chain management. Hunter is an avid reader and Dungeons and Dragons addict who studied English and Creative Writing through college. In his free time, you'll likely find him devising new dungeons for his players to explore, checking out the latest video games, writing his next horror story or running around with his daughter. [See Full Bio](https://www.selecthub.com/author/hunter-lowe/) SelectHubThe Best Compensation Planning And Analysis Tools Of 2026 * ‹ * › ### Conversation ![Avatar](https://secure.gravatar.com/avatar/281d3616cf761f3582c0d76c23517846?s=32&d=mm&r=g) Write a response [Cancel reply](https://www.selecthub.com/compensation-management/deferred-compensation/#respond) Your message Your name \* Your email \* Website Save my name, email, and website in this browser for the next time I comment. Δ [ Go to mobile version ](https://www.selecthub.com/compensation-management/deferred-compensation/?amp=1) **Tier 1:** Fully/moderately supported out-of-the-box allowing for quick and easy deployment. Fully or moderately supported out-of-the-box with industry-leading capabilities and is immediately available after installation without needing any add-ons, integrations, or custom development. **Tier 2:** Supported with workarounds or add-ons that may require additional costs. Not directly available in the software, but can be accomplished using other built-in features, workarounds, or add-ons/products from the vendor with or without any additional cost. **Tier 3:** Requires partner integrations or custom development that is often at an additional cost. Requires additional integrations, plugins, marketplace applications from a third-party vendor, or custom development using the APIs, libraries, extensions, and development framework supported by the software, with or without any additional cost. [Close](#) ```json {"@context":"https://schema.org","@graph":[{"@type":"Article","@id":"https://www.selecthub.com/compensation-management/deferred-compensation/#article","isPartOf":{"@id":"https://www.selecthub.com/compensation-management/deferred-compensation/"},"author":{"name":"Urnesha Bhattacharjee","@id":"https://www.selecthub.com/#/schema/person/d8843d7b1883406efabd754430ac4c7d"},"headline":"Deferred Compensation: A Comprehensive Guide","datePublished":"2024-08-16T19:16:50+00:00","dateModified":"2026-03-18T15:38:56+00:00","mainEntityOfPage":{"@id":"https://www.selecthub.com/compensation-management/deferred-compensation/"},"wordCount":1187,"commentCount":0,"publisher":{"@id":"https://www.selecthub.com/#organization"},"articleSection":["Compensation Management"],"inLanguage":"en-US","potentialAction":[{"@type":"CommentAction","name":"Comment","target":["https://www.selecthub.com/compensation-management/deferred-compensation/#respond"]}]},{"@type":"WebPage","@id":"https://www.selecthub.com/compensation-management/deferred-compensation/","url":"https://www.selecthub.com/compensation-management/deferred-compensation/","name":"What Is Deferred Compensation? 2026 Comprehensive Guide","isPartOf":{"@id":"https://www.selecthub.com/#website"},"datePublished":"2024-08-16T19:16:50+00:00","dateModified":"2026-03-18T15:38:56+00:00","breadcrumb":{"@id":"https://www.selecthub.com/compensation-management/deferred-compensation/#breadcrumb"},"inLanguage":"en-US","potentialAction":[{"@type":"ReadAction","target":["https://www.selecthub.com/compensation-management/deferred-compensation/"]}]},{"@type":"BreadcrumbList","@id":"https://www.selecthub.com/compensation-management/deferred-compensation/#breadcrumb","itemListElement":[{"@type":"ListItem","position":1,"name":"Home","item":"https://www.selecthub.com/"},{"@type":"ListItem","position":2,"name":"Compensation Management","item":"https://www.selecthub.com/category/compensation-management/"},{"@type":"ListItem","position":3,"name":"Deferred Compensation: A Comprehensive Guide"}]},{"@type":"WebSite","@id":"https://www.selecthub.com/#website","url":"https://www.selecthub.com/","name":"SelectHub","description":"Confidence in Software","publisher":{"@id":"https://www.selecthub.com/#organization"},"potentialAction":[{"@type":"SearchAction","target":{"@type":"EntryPoint","urlTemplate":"https://www.selecthub.com/?s={search_term_string}"},"query-input":{"@type":"PropertyValueSpecification","valueRequired":true,"valueName":"search_term_string"}}],"inLanguage":"en-US"},{"@type":"Organization","@id":"https://www.selecthub.com/#organization","name":"SelectHub","url":"https://www.selecthub.com/","logo":{"@type":"ImageObject","inLanguage":"en-US","@id":"https://www.selecthub.com/#/schema/logo/image/","url":"","contentUrl":"","caption":"SelectHub"},"image":{"@id":"https://www.selecthub.com/#/schema/logo/image/"},"sameAs":["https://www.facebook.com/selecthub/","https://x.com/SelectHub","https://www.linkedin.com/company/selecthub"]},{"@type":"Person","@id":"https://www.selecthub.com/#/schema/person/d8843d7b1883406efabd754430ac4c7d","name":"Urnesha Bhattacharjee","image":{"@type":"ImageObject","inLanguage":"en-US","@id":"https://www.selecthub.com/#/schema/person/image/","url":"https://www.selecthub.com/wp-content/uploads/2023/11/cropped-cropped-Urnesha-Headshot-2_Meet-the-Team-96x96.jpg","contentUrl":"https://www.selecthub.com/wp-content/uploads/2023/11/cropped-cropped-Urnesha-Headshot-2_Meet-the-Team-96x96.jpg","caption":"Urnesha Bhattacharjee"},"description":"Urnesha is a former Technical Content Writer at SelectHub, covering supply chain management, TMS, and compensation management. She has worked in content writing, editorship, and translation for the last 7 years. Her dream is to be a lifelong learner and venture out of her comfort zone as she does so. She's passionate about access to quality education, animal rights, and sustainability, among other things. She holds a Master's degree in English literature from the University of Hyderabad. Outside of work, you can find her listening to The Beatles, making memes, or volunteering at an animal NGO.","sameAs":["https://www.selecthub.com","https://www.linkedin.com/in/urnesha-bhattacherjee-581074140/"],"url":"https://www.selecthub.com/author/urnesha-bhattacharjee/"}]} { "@context": "https://schema.org", "@type": "Article", "headline": "Deferred Compensation: A Comprehensive Guide", "author":{ "@type": "Person", "name": "Urnesha Bhattacharjee", "url": "https://www.selecthub.com/author/urnesha-bhattacharjee/", "jobTitle":"Technical Content Writer", "image": "https://www.selecthub.com/wp-content/uploads/2023/11/cropped-cropped-Urnesha-Headshot-2_Meet-the-Team-96x96.jpg" }, "publisher":{ "@type": "Organization", "name": "SelectHub", "logo": { "@type":"ImageObject", "url": "https://www.selecthub.com/wp-content/uploads/2019/10/favicon.png" } }, "datePublished": "2024-08-16T14:16:50-06:00", "dateModified": "2026-03-18T09:38:56-06:00", "mainEntityOfPage": "https://www.selecthub.com/compensation-management/deferred-compensation/" } ```