What Is Deferred Compensation on a Paystub?

A paystub serves as a detailed record of an employee’s earnings and deductions for a specific pay period. It provides transparency regarding gross wages, taxes withheld, and various other contributions or deductions. Among the common entries, a “def comp” or similar abbreviation may appear, indicating a deferred compensation contribution. Understanding this line item is important for individuals reviewing their earnings statement. This article clarifies what deferred compensation means when it appears on a paystub.

Understanding Deferred Compensation

Deferred compensation represents an arrangement where an employee agrees to receive a portion of their income at a later date, typically during retirement or at another specified future time. Employers often establish these plans to attract and retain valuable employees, offering a benefit that encourages long-term commitment. These arrangements can also provide tax advantages by allowing employees to postpone taxation on a portion of their earnings. On a paystub, “def comp” signifies that a portion of current gross wages is being set aside for future distribution, appearing as a deduction that reduces current taxable wages for income tax purposes.

Deferred compensation plans generally fall into two broad categories: qualified and non-qualified. Qualified plans, such as 401(k)s, adhere to specific Internal Revenue Code (IRC) requirements and offer certain tax benefits and protections. Non-qualified deferred compensation plans, on the other hand, do not meet these specific IRC requirements and offer more flexibility, often used for highly compensated employees.

Common Types of Deferred Compensation Plans

Common types of deferred compensation plans frequently result in a “def comp” entry on a paystub. These plans differ based on the type of employer offering them and the specific regulations they follow.

Qualified plans are widely accessible and include the 401(k) plan, which is sponsored by private-sector employers. Contributions to a 401(k) plan are often made directly from an employee’s paycheck before income taxes are calculated. Similarly, 403(b) plans are available to employees of public schools and certain tax-exempt organizations, operating with similar pre-tax contribution mechanisms. Another common qualified plan is the 457(b) plan, typically offered to state and local government employees, also allowing for pre-tax contributions that reduce current taxable income.

Non-qualified deferred compensation (NQDC) plans serve as another type of arrangement. These plans are often established by employers for a select group of management or highly compensated employees. Unlike qualified plans, NQDC plans are not subject to the same strict regulations under the Employee Retirement Income Security Act (ERISA). The flexibility of NQDC plans allows for customized arrangements regarding contributions and distributions, making them a valuable tool for executive compensation.

Tax Implications on Your Paystub

The “def comp” line item on a paystub directly reflects how deferred compensation impacts an individual’s current taxable income. The primary distinction lies in how contributions affect federal and state income taxes versus Social Security and Medicare (FICA) taxes.

Contributions made to traditional qualified deferred compensation plans, such as a traditional 401(k), are generally pre-tax. This means the amount contributed is deducted from an employee’s gross pay before federal and state income taxes are calculated. The income and any earnings on these contributions are then taxed when they are withdrawn in retirement.

Some deferred compensation plans also offer a Roth contribution option, such as a Roth 401(k). With Roth contributions, the funds are taken from an employee’s pay after federal and state income taxes have been withheld. While the “def comp” entry will still appear on the paystub, it does not reduce current taxable income. The benefit of Roth contributions is that qualified withdrawals in retirement, including earnings, are generally tax-free.

Deferred compensation on a paystub involves FICA taxes, which include Social Security and Medicare taxes. Unlike income taxes, contributions to both qualified and non-qualified deferred compensation plans are generally subject to FICA taxes in the year the compensation is earned or deferred, not when it is paid out. This means that even if income taxes are deferred, the Social Security and Medicare portions of FICA are usually withheld from the employee’s current pay, up to applicable limits, reflecting immediately on the paystub.

Finding More Information About Your Specific Plan

While the “def comp” entry on a paystub provides a general indication, it does not detail the specific characteristics of an individual’s deferred compensation plan. The generic nature of the paystub entry means that the exact type of plan, its rules, and your personal details within it are not visible there.

The most direct source of information about a specific deferred compensation plan is the employer’s human resources (HR) department or benefits administrator. These departments can provide detailed explanations and access to relevant documents, answering questions about contribution rates, employer matching contributions, and withdrawal policies.

Employees should request and review official plan documents, such as the Summary Plan Description (SPD), for qualified plans. The SPD provides a plain-language explanation of the plan’s provisions, eligibility requirements, and how to file claims. For non-qualified plans, employees may receive individual agreements or plan summaries. These documents will specify the exact name of the plan, for example, “XYZ Company 401(k) Plan,” along with specifics about vesting schedules, which determine when an employee gains full ownership of employer contributions.