Protecting Your Wages
Deferred Compensation Plans. While a complete explanation of deferred compensation plans is beyond the scope of this book, it is important to understand a few of the principals that underlie their operation. First, at its core, a “deferred compensation” plan is simply an agreement between an employee and his or her employer to have the employer set aside a certain amount of the employee’s earnings. Since you are only taxed on compensation you “receive,” by postponing your receipt of the money, you also defer being taxed on that portion of your earnings. The full amount of the pretax earnings subject to the plan are then free to invest. There are numerous types of deferred compensation plans, but two requirements underlying all such plans are: (i) you do not have free reign to pull out assets whenever you wish otherwise you have “constructively received” those assets (i.e., you have so much control over the money you are deemed to have received it), and (ii) the assets held in the deferred compensation plan have to be subject to the general claims of the employer’s creditors (i.e., if the employer company is sued, the creditor must be able to reach the deferred compensation plan’s assets). These two requirements do not bode well from an asset protection perspective. But what if you are sued individually? Can your creditor(s) reach your deferred “earnings” held in the deferred compensation plan? Unfortunately, several courts have answered this question YES. First, deferred compensation plans do not qualify as protected “retirement plans” since they are not described under any of the relevant internal revenue code sections listed in the statutes that provide retirement accounts their protection. Second, the cases holding that deferred compensation plans are not protected have tended to give little consideration to the fact that the money held in them are “earnings.” Instead, they choose to characterize these plans as unprotected savings accounts. Therefore, if you participate in a deferred compensation plan and your employer is sued, your assets may be lost. In addition, if you are sued individually, the assets in your ‘account’ will be reachable by your creditors (most likely when you are entitled to receive them). In short, while deferred compensation plans may provide you with certain benefits, asset protection is not one of them. Page 122