A Deferred Compensation Agreement is a legal document that is created that is created between an employer and an employee wherein it is mutually decided that a set portion of the funds to be paid to the employee will be deferred or kept aside to be paid at a later date. The most application of a deferred payment system can be found in options such as a retirement plan, a pension plan, and insurance plan among many others. This legal document acts as a bond of trust between both the organizations and outlines the terms and conditions under which the deferred compensation plan has been agreed upon.
This document states the dates on which the deferred amount will be paid to the said party, the rate of tax that will be applicable and also mentions the amount of benefits the party will receive since he or she has agreed to a deferred compensation plan.
When Do You Need a Deferred Compensation Agreement?
The most common application of such a contract or legal document can be found in a company or organization where there is a contract between the employer and the employee. In this contract, the employer clearly mentions the percentage of funds that will be kept aside as deferred and for how long such funds will be kept. The main principle of keeping aside a certain portion of the employee’s salary is to make a large whole sum amount that can be handed out or withdrawn whenever there is a need.
Inclusions in Deferred Compensation Agreement
- Parties Involved: In a Deferred Compensation Agreement there is usually two parties involved; the first being the company who is the employer and the second party is an employee who works for the said company.
- Effective Dates: This section of the contract outlines the date from which this agreement will come into effect and also mentions the entire tenure of the contract.
- Where does it Apply: This contract is legally binding within the boundaries of the state, city or county it was originally drawn at.
How to Draft a Deferred Compensation Agreement?
Follow the mentioned below steps in order to draw a Deferred Compensation Agreement.
- Organize a meeting between both the parties who are signing a Deferred Compensation Agreement. Discuss upon the terms of the contract, when will the said contract come into effect, how much percentage of funds will be deferred and when will the deferred funds be paid out, among other details.
- Once both the parties have agreed to the terms and conditions, reach out to a legal team and ask them to draft a Deferred Compensation Agreement on your organization’s behalf.
- Cross verify and check the details with both the parties and file the contract in the local court of law as advised by your legal team.
Benefits of a Deferred Compensation Agreement
The benefits of having a Deferred Compensation Agreement are outlined as below.
Pros of Deferred Compensation Agreement
- This legal document clearly outlines the individual responsibilities of both the parties before and after the contract has come into effect and thus makes sure that both parties are well aware of their duties and responsibilities at all points in time.
- This contract is a legal document and thus can be presented in court if there ever a need in the future for the same.
Cons of not having a Deferred Compensation Agreement
- In the absence of a Deferred Compensation Agreement, both the parties don’t have a legal proof of a transaction ever taking place between both the entities and therefore stand to lose if the matter is ever taken to court.
Key Terms & Clauses in Deferred Compensation Agreement
- Notices: Both the stakeholders in the contract need to issue certain notices to each other and this section of the contract, outlines the details of the same.
- Disclaimers: The parties involved in the creation of the contract need to provide certain disclaimers to each other and this section contains details of the same.
- Remedies: In the case of a lapse in agreed terms and conditions or a default in payment, certain remedies immediately come into effect, the details of which are enclosed in this section of the contract.
- Obligations: Both the parties have certain obligations to each other, during, and after the creation of the contract, the details of which are mentioned here.
Sample for Deferred Compensation Agreement
Download a sample Deferred Compensation Agreement by clicking here.
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