Deferred Bonuses

Another type of nonqualified plan is the deferred payment of an annual bonus. As with most nonqualified plans, simplicity is its greatest feature.

In addition, from a tax standpoint, it is usually better for an executive or highly paid employee to defer money until lower-income years such as, for example, retirement. The benefit here is that money paid after retirement is usually taxed at a much lower rate, resulting in greater after-tax income for the employee.

The simplest form of deferral is postponing the receipt of one year's bonus and having it paid over several annual installments, frequently over five years. An unfunded plan may, at the participant's option to defer receipt of the entire bonus amount, defer the tax consequences of the bonus payment, even though it serves no other purpose.

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