An employee deferred compensation agreement, or a DCAP, is a type of retirement plan that allows employees to defer a portion of their income until retirement. These plans are commonly used by employers to attract and retain top talent while also helping employees save for their retirement. In this article, we will explore the ins and outs of employee deferred compensation agreements, including what they are, how they work, and who is eligible to participate.
What is an Employee Deferred Compensation Agreement?
An employee deferred compensation agreement is a type of retirement plan that allows employees to defer a portion of their income until retirement. This is different from other types of retirement plans, such as a 401(k), because the contributions are made by the employee, not the employer. The contributions are then invested in a variety of different investment options, which vary by plan and by the employee`s investment goals.
How does an Employee Deferred Compensation Agreement Work?
An employee deferred compensation agreement works by allowing employees to contribute a portion of their income to the plan on a pre-tax basis. This means that the money they contribute is not subject to income tax until it is withdrawn from the plan. Once the money is in the plan, it can be invested in a variety of different investment options, such as mutual funds, stocks, and bonds.
The plan is designed to help employees save for their retirement, so there are typically strict rules around when and how much money can be withdrawn from the plan. For example, most plans require that employees wait until they reach a certain age, such as 65, before they can begin withdrawing money from the plan.
Who is Eligible to Participate?
Not all employees are eligible to participate in an employee deferred compensation agreement. The eligibility requirements vary by plan, but typically employees must be full-time and meet certain tenure requirements before they can participate. In addition, some plans may only be available to employees in certain job categories, such as executives or highly-compensated employees.
Conclusion
Employee deferred compensation agreements are a valuable tool for both employers and employees. They allow employers to attract and retain top talent by offering a valuable retirement benefit, while employees benefit from the ability to defer a portion of their income until retirement. If you are interested in setting up an employee deferred compensation agreement for your employees, it is important to work with a financial advisor and an attorney to make sure that your plan meets all legal and regulatory requirements.