Updated 4 months ago
Organizations operating from a strategic mindset often create lucrative deferred plans to attract and retain the best talent. Aggressive start-up companies with strong valuations often create deferred compensation plans to recruit top executives and/or sales professionals who may not otherwise choose a small operation. The incentives to meet growth goals can be enticing to top performers. Companies wanting to prevent top performers from looking at such opportunities establish creative — and lucrative — plans to keep executives loyal and engaged.
The key to mutually beneficial plans is managing expectations. The compensation provided must be tied to measurable results. The IRS imposed penalties for non-compliant deferred compensation were increased significantly after abuse. However, even though companies are usually the ones to structure the plan, the employee is the one penalized if the plan does not meet IRS compliance. The penalties can be up to 20%, plus interest. This hardship can leave a very bitter taste with the very ones companies want to enjoy sweet rewards.
A thorough review of deferred compensation plans includes:
- Is it in writing? Handshake agreements unfortunately do not bode well for either party. Any agreement to defer compensation must be in writing where the employee and the organization’s representative acknowledge understanding with signatures.
- Is it in compliance? The IRS is explicit on the establishment of deferred compensation plans. Those not in compliance with 409-A will be penalized.
- Are expectations understood? Agreements for deferred compensation cannot be the dangling carrot that keeps moving. Both the employee and company representatives need to discuss clearly the performance expectations and regularly monitor progress to the goal.
- Are date-certain timetables established? Once the firmly-established expectations for receiving the compensation are met, timetables for payout must be followed.
- Is there full disclosure? Since the penalties fall on the employee if plans are not established properly, companies should be proactive to encourage the employee to have the agreement reviewed by his/her own legal advisor prior to signing.
In a competitive business environment, deferred compensation plans are a valuable tool to attract and retain top team members. Companies need to be sure to be fiscally responsible and fair to the employees they seek to reward.
Tripp Scott Law Firm
Fort Lauderdale • Boca Raton • Tallahassee
954.525.7500 • TrippScott.com