Drafting a Deferred Compensation Agreement

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Also note: This is not legal advice.

Introduction

When it comes to drafting a deferred compensation agreement, employers and employees alike need to ensure that the details of the contract are fair and equitable. Deferred compensation agreements are an important way for employers to retain talented employees, attract new talent and reward existing staff - while also giving employees a measure of financial security. But with so many legal, tax, and accounting implications involved, employers must carefully consider the terms of their agreement before signing.

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Creating a deferred compensation agreement is not only important for providing financial security to your employees but also incentivizes them to stay with the company in order to enjoy future earnings potentials. And best of all? Using Genie AI’s template library doesn’t require you having an account with us - we simply want to help! So read on below for more information on our free template library today.

Definitions (feel free to skip)

Deferred Compensation Agreement: A written contract between an employer and an employee, or between a company and a contractor, that allows the employee or contractor to postpone receiving their income.

Eligibility Requirements: Conditions that must be met by an employee or contractor in order to qualify for a deferred compensation agreement.

Length of Term: The duration of a deferred compensation agreement.

Benefits: Advantages of a deferred compensation agreement, such as reduced taxes on current income.

Tax Implications: How taxes are applied to income earned under a deferred compensation agreement.

Accounting: The process of tracking contributions, withdrawals, and interest earned on income that is deferred under a deferred compensation agreement.

Required Forms: Documents that must be completed and signed in order for a deferred compensation agreement to be valid.

Retaining Records: Storing copies of all forms and documents related to a deferred compensation agreement in a secure location.

Initial Negotiations: Discussions between parties prior to entering into a deferred compensation agreement.

Finalizing Agreement: Drafting and executing documents related to a deferred compensation agreement.

Obtaining Approval: Seeking approval from the appropriate parties for a deferred compensation agreement.

Employer Responsibilities: The duties of an employer when it comes to a deferred compensation agreement, such as making sure the agreement is compliant with applicable laws.

Employee Responsibilities: The obligations of an employee or contractor when it comes to a deferred compensation agreement, such as understanding the terms of the agreement and ensuring taxes are paid.

Making Changes: Modifying the terms of a deferred compensation agreement.

Terminating Agreement: Ending a deferred compensation agreement.

Dispute Resolution Process: Methods used to resolve any disagreements between parties regarding a deferred compensation agreement, such as mediation or arbitration.

Tracking Contributions: Monitoring payments made to a deferred compensation account.

Reporting Requirements: Filing forms with the IRS, such as Form 941, Form W-2, and Form 1099, and ensuring contributions and withdrawals are properly reported on the employee’s or contractor’s individual tax return.

Regulatory Compliance Requirements: Making sure a deferred compensation agreement is compliant with all applicable laws and regulations.

Contents

• Overview of the Deferred Compensation Agreement
• Details of the Agreement, Including:
• Eligibility Requirements
• Length of Term
• Benefits
• Tax Implications of a Deferred Compensation Agreement
• Accounting for a Deferred Compensation Agreement
• Initial Setup
• Ongoing Contributions
• Accounting for Withdrawals
• Documentation Requirements for a Deferred Compensation Agreement
• Required Forms
• Retaining Records
• Negotiations and Approval Process for a Deferred Compensation Agreement
• Initial Negotiations
• Finalizing Agreement
• Obtaining Approval
• Role of the Employer and Employee in a Deferred Compensation Agreement
• Employer Responsibilities
• Employee Responsibilities
• Changes, Termination, and Dispute Resolution Process for a Deferred Compensation Agreement
• Making Changes
• Termination of the Agreement
• Dispute Resolution Process
• Monitoring and Reporting Requirements for a Deferred Compensation Agreement
• Tracking Contributions
• Reporting Requirements
• Regulatory Compliance Requirements for a Deferred Compensation Agreement

Get started

Overview of the Deferred Compensation Agreement

• Understand the purpose of the agreement
• Become familiar with the language used in the agreement
• Research the laws, regulations, and best practices governing the agreement
• Discuss the details of the agreement with the other party
• Draft a basic outline of the agreement
• Check for any missing components or issues that need to be addressed
• Make any necessary revisions or changes to the agreement

You’ll know you can check this off your list and move on to the next step when you have drafted a basic outline of the agreement and made any necessary revisions or changes.

Details of the Agreement, Including:

• Identify the type of agreement to be used (e.g., a nonqualified deferred compensation agreement, a deferred profit-sharing plan, etc.).
• Describe the parties involved and the rights and responsibilities of each.
• Establish the amount of the deferred compensation and any applicable limits.
• Specify when and how the deferred compensation will be paid out.
• Detail any applicable taxes and filing requirements.
• Include any other pertinent information related to the agreement.

Checklist item to know when this step is complete:

• All details of the agreement have been identified and included.

Eligibility Requirements

• Define who is eligible to participate in the deferred compensation agreement
• Consider factors such as job title, job function, and seniority level
• Outline any requirements, such as a minimum period of service, or other criteria
• Make sure to include any applicable laws or regulations that may impact eligibility
• When you have established all requirements, you can move on to the next step: outlining the length of the term.

Length of Term

• Determine the length of the Deferred Compensation Agreement.
• Consider the length of time that the employee will need to fulfill their obligations under the agreement and the length of time that the employer is willing to provide benefits to the employee.
• Review the applicable laws in the jurisdiction where the employee is located to ensure compliance with any legal requirements.
• Set a specific date for the beginning and end of the agreement and include it in the document.

When you can check this off your list and move on to the next step:

• When you have determined the length of the Deferred Compensation Agreement and included the start and end dates in the document.

Benefits

• Identify what benefits are to be provided to the employee
• Specify the amount of deferred compensation to be paid
• Detail the frequency of the payments
• Outline when the deferred compensation will be available to the employee
• Agree on who will be responsible for the associated taxes
• Specify the circumstances in which the agreement will be terminated
• Check that all benefits are in compliance with local and federal laws

When you have completed the above steps, you will have a comprehensive overview of the benefits to be provided to the employee. You can then move on to the next step, which is to outline the tax implications of the deferred compensation agreement.

Tax Implications of a Deferred Compensation Agreement

• Research applicable taxes that may be imposed on a deferred compensation agreement, such as income taxes, Social Security, Medicare, and other applicable taxes
• Understand the differences in taxation for different types of deferred compensation, such as deferred salary, deferred bonuses, and restricted stock units
• Draft a clause in the agreement specifying when and how the taxes will be paid
• Draft a clause specifying who will be responsible for paying the taxes, such as the employer or the employee
• You will know you can check this off your list and move on to the next step when you have included all relevant tax information in the agreement and have specified who is responsible for paying the taxes.

Accounting for a Deferred Compensation Agreement

• Determine the type of accounting to be used for the deferred compensation agreement (accrual or cash basis).
• Calculate the amount of deferred compensation to be paid out.
• Record the deferred compensation agreement in the company’s accounting records.
• Reconcile the deferred compensation agreement with other company accounts.
• Prepare a periodic report showing the current balance of the deferred compensation agreement.

Once you have completed the accounting for the deferred compensation agreement, you can move on to the next step: Initial Setup.

Initial Setup

• Consult with an attorney to draft a deferred compensation agreement that meets the requirements of the Internal Revenue Code
• Ensure the agreement is tailored to the individual employee and includes clear language about the terms of the agreement
• Determine the vesting schedule, as well as any bonuses or other incentives associated with the agreement
• Clarify the specifics of the employee’s pay structure and vesting schedule, as well as any other applicable benefits
• Have the agreement reviewed by the company’s legal counsel and obtain necessary signatures
• When all steps have been completed and the agreement is finalized and signed, you can move on to the next step.

Ongoing Contributions

• Determine how often and in what form the employer will make contributions to the employee’s deferred compensation plan.
• Determine if the employer’s contributions are discretionary or mandatory.
• If the employer’s contributions are discretionary, determine the criteria for when the employer will make contributions.
• Determine if the employer’s contributions are subject to vesting or forfeiture restrictions.
• Establish the types of contributions the employer will make to the employee’s deferred compensation plan.
• Establish the terms of the employer’s contributions, including how long the contributions will be made and when they will be made.
• Establish how the contributions will be invested and managed.

You will know that you can check this off your list and move on to the next step when the terms of the employer’s contributions and the types of contributions are established and agreed upon.

Accounting for Withdrawals

• Determine the terms of the withdrawals, such as the minimum amount, withdrawal frequency, and fees associated with early withdrawal.
• Consider tax and other legal implications when determining the withdrawal terms.
• Include a provision in the agreement that allows the employer to change the terms of the withdrawal at any time.
• Ensure that the employer has the ability to monitor the withdrawal activity.
• Once the withdrawal terms are established and the agreement is finalized, the employer can begin to make withdrawals from the account.

You can check this off your list once you have determined and included the withdrawal terms in the agreement and the employer has the ability to monitor the withdrawal activity.

Documentation Requirements for a Deferred Compensation Agreement

• Gather the various documents and information necessary to draft the agreement, such as the names and addresses of the employer and employee, the amount of the deferred compensation and the period of time it will cover.
• Review the applicable regulations and laws related to deferred compensation and incorporate their requirements into the agreement.
• Draft the agreement, making sure it meets the requirements of the applicable regulations and laws and includes the necessary terms and conditions.
• Have an attorney review and approve the agreement before it is signed by both parties.

Once the agreement is drafted and approved by an attorney, you can check this step off your list and move on to the next step.

Required Forms

• Obtain the necessary forms for a deferred compensation agreement, including the employee’s acknowledgement of the agreement and an IRS Form W-4P.
• Make sure each form is filled out completely and accurately with all relevant information.
• Ensure that the employee has signed and dated the acknowledgement form.
• Once all forms are completed and signed, you can check this step off your list and move on to the next step.

Retaining Records

• Compile all original documents related to the agreement, such as the agreement itself and any forms or documents related to it
• Store these documents in a secure, organized location
• Make sure to keep the documents for the duration of the agreement

You can check off this step when you have collected and stored all documents related to the agreement and stored them in a secure location.

Negotiations and Approval Process for a Deferred Compensation Agreement

• Negotiate the terms of the deferred compensation agreement with the employee and employer
• Make sure both parties are in agreement with the terms and conditions
• Draft the agreement and have both the employer and employee sign it
• Make sure all relevant information is included in the agreement (e.g. salary, compensation amount, vesting schedules, etc.)
• Have the agreement reviewed by a third-party to ensure all legal requirements are met
• When the agreement is finalized and signed, store it in a secure location
• How you’ll know when you can check this off your list and move on to the next step: Once the agreement is finalized and signed, the negotiations and approval process are complete and you can move on to the next step.

Initial Negotiations

• Identify the key terms to be included in the agreement, such as the amount of deferred compensation, the payment schedule, and the vesting period
• Negotiate with the parties to determine the terms of the agreement
• Review any applicable laws or regulations that may affect the agreement
• Draft and circulate the agreement to the parties for review
• When both parties have agreed to the terms of the agreement, the initial negotiations step is complete and you can move on to the next step of finalizing the agreement.

Finalizing Agreement

• Review the agreement and ensure that all of the agreed upon terms, conditions, and compensation are included
• Make any necessary changes to the agreement if there are any discrepancies
• Have both parties sign the agreement
• Make two copies of the signed agreement and have each party retain their own copy
• Once the agreement is signed and both parties have a copy, the process of finalizing the deferred compensation agreement is complete and you can move on to the next step.

Obtaining Approval

• Obtain an approval from the employer and the employee for the Deferred Compensation Agreement
• Create a document that outlines the employer and employee’s responsibilities, rights, and obligations under the agreement
• Have the employer and employee sign the agreement
• Once both parties have signed the agreement, it is considered legally binding
• You can check off this step once the agreement has been signed by both parties.

Role of the Employer and Employee in a Deferred Compensation Agreement

• Employer: Establish a deferred compensation plan that outlines the details of the agreement, including the amount of money to be deferred, the timing of payment, and any other terms and conditions.
• Employee: Understand the terms and conditions of the deferred compensation agreement, and enter into the agreement in writing.
• Both: Ensure that the deferred compensation plan is compliant with all applicable laws and regulations.

Checklist item: When both parties have agreed to the terms and conditions of the deferred compensation agreement, the employer and employee have completed their roles in the deferred compensation agreement.

Employer Responsibilities

• Draft the agreement, taking into account the employee’s desired terms for deferred compensation
• Consult with a lawyer or other professional if needed to ensure that the agreement is legally binding
• Identify the form of deferred compensation, such as stock options, retirement plans, pension plans, or deferred salary
• Establish the vesting schedule for the deferred compensation
• Determine how the employee will receive the deferred compensation, such as a lump sum, periodic payments, or a combination of both
• Specify the duration of the agreement
• Sign the agreement with both parties in order to make the agreement legally binding
• When these steps are completed, you can move on to the next step, which is to outline the employee’s responsibilities.

Employee Responsibilities

• Read and understand the entire deferred compensation agreement
• Stay up to date on any changes to the agreement
• Make sure all contributions are made on time and in the correct amount
• Understand and comply with all applicable taxation laws
• Make sure all payments are made on time and in the correct amount
• Understand the implications of taking a loan or making an early withdrawal
• Understand any restrictions or limitations that apply

Once all the above steps have been completed, you can check this off your list and move on to the next step of understanding the Changes, Termination, and Dispute Resolution Process for a Deferred Compensation Agreement.

Changes, Termination, and Dispute Resolution Process for a Deferred Compensation Agreement

• Specify when the deferred compensation agreement can be terminated, such as on the employee’s retirement, death, or termination of employment.
• Include a provision that states the employer can make changes to the agreement and that the employee will be notified of any changes in writing.
• Include a section that details how disputes between the employer and employee will be resolved.
• Make sure to include an effective date and signature lines for both the employer and employee.

You can check this off your list when you have included all of the necessary information and both parties have signed the agreement.

Making Changes

• Review the draft deferred compensation agreement and identify areas that need to be amended
• Consult with the employer and employee to discuss any changes that need to be made
• Make the necessary changes to the agreement, ensuring that all parties are in agreement with the changes
• Ensure that all changes are properly documented
• Once the changes have been made and all parties are in agreement, the draft agreement is ready for termination
• You will know when you can check this off your list and move on to the next step when all changes to the agreement have been documented and all parties are in agreement.

Termination of the Agreement

• Determine if termination of the agreement should be based on a fixed date or certain events, such as retirement
• Specify the conditions that will lead to the agreement being terminated
• Outline the obligations of the parties upon termination of the agreement
• Ensure that any accrued but unpaid benefits are paid out to the employee upon termination
• Include a clause that requires the employee to execute a release of claims in order to receive the deferred compensation
• Include a clause that requires the employee to return any company property that was provided upon termination of the agreement
• Include a clause that requires the employee to keep all information confidential after the termination of the agreement
• When all of the above items have been addressed, check this step off your list and move on to the next step: Dispute Resolution Process.

Dispute Resolution Process

• Decide on the mechanisms that will be used to resolve any disputes that may arise under the agreement.
• Consider the use of non-judicial dispute resolution processes like mediation or arbitration.
• Outline the process for resolving disputes, including a timeline for when the dispute must be submitted and when a resolution must be reached.
• Determine which party is responsible for the costs of dispute resolution.
• Include the agreement in the deferred compensation plan that all parties agree to use dispute resolution to resolve all disputes arising from the agreement.

Once you have completed all the necessary steps in drafting the dispute resolution process, you can check it off your list and move on to the next step of drafting the Monitoring and Reporting Requirements for a Deferred Compensation Agreement.

Monitoring and Reporting Requirements for a Deferred Compensation Agreement

• Establish a reporting process for the deferred compensation agreement to ensure that all contributions are tracked and reported in a timely manner
• Determine who is responsible for reporting and tracking contributions under the agreement
• Establish a timeline for reporting and tracking contributions
• Establish guidelines for how and when to report contributions
• Establish a process for reviewing and verifying reported contributions
• When all of the above have been established, you can move on to the next step of the guide: Tracking Contributions.

Tracking Contributions

• Keep track of contributions made to the deferred compensation agreement by both employer and employee
• Document any changes to the agreement made by either party
• Ensure that all contributions are tracked and properly reported in a timely manner
• Keep a record of the total amount of contributions and any changes made over the life of the agreement
• When all contributions have been tracked and recorded, you can move on to the next step.

Reporting Requirements

• Establish what type of reporting is required for the Deferred Compensation Agreement.
• Ensure that the reporting requirements are detailed in the agreement, including frequency, required information, and deadlines.
• Specify who is responsible for providing the reports and who is responsible for reviewing them.
• Determine what action will be taken in the case of non-compliance with reporting requirements.

Once reporting requirements are detailed in the agreement, you can move on to the next step of ensuring compliance with regulatory requirements.

Regulatory Compliance Requirements for a Deferred Compensation Agreement

• Research applicable state and federal laws to ensure that the agreement complies with all applicable requirements
• Consult a legal professional if you are unsure of any of the compliance requirements
• Write the deferred compensation agreement to make sure that it includes all required elements, such as a description of the compensation, the vesting and payment schedule, and the applicable tax withholding rules
• Make sure to include a clause that defines when the agreement will terminate
• Check that the agreement does not conflict with any existing company policies or employment contracts

Once you have completed all the necessary steps for compliance, you can check this off your list and move on to the next step.

FAQ:

Q: What are the differences between drafting a Deferred Compensation Agreement in the US, UK, and EU?

Asked by Kayleigh on April 24th, 2022.
A: The differences between drafting a Deferred Compensation Agreement in the US, UK, and EU depend on the jurisdiction and laws of the country in question. In the US for example, deferred compensation agreements must comply with Section 409A of the Internal Revenue Code, which requires employers to defer compensation to employees until certain events occur or certain dates are reached. In the UK, deferred compensation agreements are generally governed by common law principles, while in the EU they must meet the requirements of local employment law.

Q: What do I need to consider when drafting a Deferred Compensation Agreement?

Asked by Aidan on June 2nd, 2022.
A: When drafting a Deferred Compensation Agreement there are several things to consider. Firstly, you need to make sure that you understand the relevant laws and regulations in the jurisdiction where you will be creating the agreement. You should also consider how you will structure the agreement and what terms should be included such as how and when payments will be made. Additionally, you need to consider how taxes will be handled for both employer and employee. Finally, it’s important to make sure that all parties involved in the agreement understand its terms and conditions.

Q: What is vesting?

Asked by Brandon on September 7th, 2022.
A: Vesting is a term used to describe when an employee has earned a right to receive certain benefits from their employer. Generally speaking, vesting occurs after an employee has worked for a certain period of time or completed certain goals or tasks set out in their employment contract or deferred compensation agreement. Vested benefits can include things like bonuses, stock options or other forms of deferred compensation.

Q: What is a clawback provision?

Asked by Addison on August 12th, 2022.
A: A clawback provision is a clause included in a deferred compensation agreement which allows an employer to reclaim part or all of an employee’s deferred compensation if certain conditions are not met. These conditions can vary but generally include things like failing to stay with the company for a certain period of time or failing to meet performance goals set out in their employment contract or deferred compensation agreement. Clawback provisions are designed to protect employers from having their funds misused or abused by employees who do not fulfill their obligations under the agreement.

Q: What happens if an employee breaches a Deferred Compensation Agreement?

Asked by Ethan on May 29th, 2022.
A: If an employee breaches a Deferred Compensation Agreement then they may be subject to legal action taken by their employer. This could include being required to pay back any amounts they have received under the agreement or being subject to fines or other penalties imposed by an applicable law or regulation. Depending on the circumstances surrounding the breach, an employee may also be subject to disciplinary action taken by their employer such as suspension or even dismissal from their job.

Example dispute

Employee Suing Employer for Breach of Deferred Compensation Agreement

• Plaintiff may sue employer for breach of a deferred compensation agreement when the employer fails to pay out the agreed upon compensation to the employee at the designated time.
• Plaintiff must prove that the agreement was valid and legally binding, that it was breached, and that damages resulted from the breach.
• The plaintiff may provide evidence such as a copy of the agreement or testimony from witnesses or other documents that support their claim.
• The plaintiff may seek damages to be paid in the form of the money owed as well as any consequential damages that may have resulted from the breach, such as lost wages due to the delay of payment.
• Settlement may be reached through negotiation or mediation, or the plaintiff may pursue a civil lawsuit.
• If the lawsuit is successful, the plaintiff may be awarded damages, which may include the amount of money deferred, interest, and attorney fees.

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