Hartford Business Journal

22 HARTFORDBUSINESS.COM | JUNE 15, 2026 FOCUS | WE ALTH MANAGEMENT EXPERT'S CORNER Deferred compensation plans: smart strategy or hidden risk? By Jonathan Matthews D eferred compensation plans are often positioned as a powerful tax and retirement planning tool, especially for high-in- come professionals and executives. On the surface, the concept is simple: defer a portion of your income today and receive it later, ideally when you're in a lower tax bracket. But like many financial strategies, the real value lies in the details. Used correctly, deferred compen- sation can be a smart, strategic lever. Used incorrectly — or without full understanding — it can intro- duce meaningful risks that are often overlooked. What is a deferred compensation plan? A deferred compensation plan allows you to postpone receiving a portion of your income until a future date, typically retirement. The most common forms include nonqualified deferred compensation (NQDC) plans, which are offered by employers to select employees; and qualified plans, such as 40(k)s, which have contribution limits and regulatory protections. For high earners, deferred compen- sation can serve several key purposes: 1. Tax deferral: By postponing income, you avoid paying taxes on that money today. If structured properly, distributions in retirement may be taxed at a lower rate. 2. Supplemental retirement savings: Unlike qualified plans, many NQDC plans allow you to defer significantly more income, helping close retirement savings gaps for executives who have already maxed out traditional accounts. 3. Timing flexibility: Some plans allow you to choose when distribu- tions occur — retirement, a future date or even staggered payouts — creating opportunities for tax planning. 4. Potential investment growth: Deferred amounts are often tied to investment options, allowing for tax-deferred growth over time. From a planning standpoint, these benefits can be meaningful, particu- larly when integrated into a broader strategy that includes tax, retirement and estate considerations. The hidden risks Where deferred compensation becomes more complex, and poten- tially problematic, is in the structure of these plans. Here are some things to consider. 1. Lack of ownership and creditor risk: With most nonqualified plans, your deferred income is not held in a separate, protected account. It remains part of the employer's general assets. That means that if the company faces financial trouble or bankruptcy, your deferred compensation could be at risk. And that means that you are essentially an unsecured creditor. This is one of the most critical and often misunderstood risks. 2. Limited liquidity and control: Once you elect to defer income, you typically cannot access it early without penalties. This lack of flexibility can become problematic if your financial situation changes. 3. Tax timing risk: While deferring income may reduce taxes today, it introduces uncertainty about future tax rates. If tax rates rise or your income in retirement is higher than expected, you may not realize the anticipated benefit. 4. Distribution constraints: IRS rules around deferred compensation are strict. Elections must be made in advance, and changing them later can be difficult or costly. 5. Overconcentration risk: Many executives already have significant exposure to their employer through salary, bonuses, stock options and equity. Deferred compensation can further concentrate financial risk in a single entity. Deferred compensation plans tend to work best when you are in a high current tax bracket and expect lower income later; your employer is finan- cially strong and stable; you have suffi- cient liquidity outside the plan; and the strategy is part of a coordinated finan- cial plan, not a standalone decision. In other words, it's not just about whether the plan is "good" or "bad;" it's about how it fits into your broader financial architecture. Jonathan Matthews is an associate vice president, wealth advisor at WHZ Strategic Wealth Advisors, which has offices in Pomfret and Tolland. WHZ does not provide tax or legal advice, and nothing in this column should be construed as specific tax or legal advice. Jonathan Matthews WWW.WEALTHSPIRE.COM 29 South Main Street, Suite 300 West Hartford, CT 06107 (860) 561-1162 Your Aspirations. Our Inspiration. Wealthspire Advisors LLC and certain of its aff iliates are separately registered investment advisers ©2026 Wealthspire Wealthspire offers personalized wealth management in the Greater Hartford area, grounded in a thoughtful and organized approach to f inancial planning. If you're looking for experienced guidance and a team focused on your long‐term goals, we'd be happy to start the conversation.

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