July 18, 2024

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What Happens to Deferred Compensation If I Quit?

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what happens to deferred compensation if i quit

Deferred compensation is a way for employees to reduce their tax burden while ensuring their economic security in their golden years. Deferred compensation plans with a long vesting period are commonly referred to as golden handcuffs because they effectively trap you in a job, no matter how badly you’d like to resign. Here’s what you need to know to determine if your golden handcuffs are worth staying at your job and how much quitting will cost your future self. If you’re looking for guidance in your current financial situation, consider working with a professional financial advisor. 

Qualified vs. Non-Qualified Deferred Compensation Plans

In a nutshell, deferred compensation plans are a way to be compensated for your work without receiving money immediately. By delaying your compensation, you’re simultaneously able to save for retirement and reduce your tax burden for the current year by lowering your taxable income. 

Deferred compensation plans are either qualified or non-qualified plans. Which one you have will affect how your plan’s funds are treated if you quit. 

Qualified Plans

Qualified plans are ones that meet the requirements outlined in the Employee Retirement Income Security Act (ERISA) of 1974. Common qualified plans include 401(k)s, 403(b)s, Keogh plans and SEP IRAs. Qualified plans are more tightly regulated and have stricter rules around contribution limits and withdrawals. 

Qualified plans include several characteristics that separate them from non-qualified ones including: 

  • Allowing all employees who meet eligibility requirements to participate, this type of plan isn’t just limited to executives.

  • Vesting after a specified date, meaning that if your account is vested, your balance is yours even if you leave the company on bad terms. 

  • Standardized compensation is proportionate across all employees, meaning that entry-level employees are entitled to the same percentage rate of compensation…

2023-12-24 11:21:39

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