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Deferred compensation arrangements appeal to executives and other highly paid employees because they allow each participating executive to postpone their recognition of income taxes until a future year. There aren’t any caps on the amount that may be deferred into a nonqualified deferred compensation plan, commonly referred to as a Supplemental Executive Retirement Plan (SERP), as there are for qualified plans. So a defined contribution variety can consider the executive’s compensation above the Section 402(g) limit (the 401(k) plan-annual limit), the Section 415 limit (for annual additions), and the Section 401(a)(17) limit (on compensation that can be recognized in determining the amount of contributions). However, participating in these plans does carry risk as the assets used to fund the plan, which may have been a deferral of the executive’s own compensation, must remain subject to the claims of the sponsoring company's creditors until they are paid out. Enter the rabbi trust which provides greater assurance to the executive that these amounts ultimately will be paid to the executive on the prescribed payable event.
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