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 as C-suite executives. 

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Non-Qualified Plans

By contrast, Non-Qualified Deferred Compensation (NQDC) plans are ones that don’t meet the requirements outlined in the ERISA and have no contribution limits and more flexible withdrawal rules. NQDC plans are available only for key employees as defined by the Department of Labor. Key employees are typically executive-level employees or ones with unique and vital roles.

These plans don’t offer the same tax deductions as qualified plans, but the lack of contribution limits allows employees to reduce their taxable income substantially. Assets in non-qualified plans belong to the employer, not the employee and can be seized by the employer’s creditors. If you have an NQDC plan, the terms of your plan could mean that you forfeit all or part of your deferred compensation if you leave the company early. 

What You Need to Know About Vesting

Both qualified and non-qualified deferred compensation plans can have vesting periods. Qualified plans are required to have vesting periods. Non-qualified plans are not, but occasionally do. 

Vesting periods can be anywhere from immediately after your first contribution to several years long. For qualified plans, typically, the entire amount subject to vesting is vested once it reaches the time requirement. For example, if a qualified plan has a vesting period of one year, then once the participant has reached one year with the company, their entire account balance is vested. 

If an NQDC plan has a vesting period, it may only be for a portion of the amount in the plan, rather than the whole balance. NQDC rules are highly specific, so review your plan’s materials carefully.

How To Find Out If You’re Vested

Contacting your human resources office and saying, “I’m thinking about quitting, can you tell me if my deferred compensation plan is vested?” would work, but isn’t advisable. There are several ways you can find out if your deferred compensation is vested without tipping off your job to your unhappiness with your role. 

The best place to start is by looking through your plan’s materials. Your account balance summary or quarterly statement will typically have detailed information on what portion of your balance is vested and what portion will be vested by a specified date. 

If you have a non-qualified plan, you’ll most likely have to refer to the employment contract you signed when you started the role that gave you the NQDC plan. All NQDC plans must conform to the requirements of secti409(a) of thn Internal Revenue Code and provide documentation to employees. Somewhere there should be an explicit statement saying what you’re eligible for and when. 

If you’re still not able to determine what, if any, of your deferred compensation is vested, your situation may call for some subterfuge. Updating your life insurance policies, trust or estate plan are all great reasons to get clarification from HR and don’t make it seem as though you’re considering leaving the company. 

Quitting and Forfeiting Money vs. Staying

If there’s anything that we’ve learned in the turmoil of the last few years, it’s that life is precious. If you’re in an unfortunate situation where quitting your job means giving up a large amount of compensation, you have some tough decisions to make. 

Sit down with a Certified Financial Planner (CFP) to determine how big of an impact on your future spending giving up your deferred compensation will have. It’s possible that you’re at a point in your career where doing so would prevent you from doing something vital, like paying for your parent’s assisted living facility. If it’s something more frivolous, like having to downgrade from a Lamborghini to a Porsche, it may be worth quitting your job. 

Only you know how much you dislike your current role, but an advisor can help you see how large or small of an impact quitting will have on your long-term financial well-being. You may find that quitting now to preserve your mental well-being and regain time with your loved ones is worth the reduced income later on. 

The Bottom Line

If you have a qualified plan and have passed the vesting period, your deferred compensation is yours, even if you quit with no notice on very bad terms. If you have a non-qualified plan, you may have to forfeit all of your deferred compensation by quitting depending on your plan’s specific terms. Review your plan documents and your employment contract with a financial professional to help determine if staying or quitting is the best choice for your current and future self.

Tips for Wealth Building

• If you’re looking for ways to maximize the growth of your money, consider working with a financial advisor. An advisor can help you create an investment plan or even manage your wealth for you. If you don’t have an advisor, finding one doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.

• If you’re not sure how much to invest because you’re curious about the potential return, consider using SmartAsset’s free investment calculator.

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