assets as a courtesy, legally, they're allowed to and may be forced to give deferred compensation assets to creditors in the case of bankruptcy. A special kind of trust called a rabbi trust (because it was first used in the compensation plan for a rabbi) may be used. A rabbi trust puts a "fence" around the money inside the corporation and protects it from being raided for most uses other than the corporation's bankruptcy/insolvency. However, plan participants may not receive a guarantee that they'll be paid prior to creditors being paid in case of insolvency. ERISA plans may not discriminate in favor of highly compensated employees on a percentage basis. If the president of the company is making $1,000,000/year and a clerk is making $30,000, and the company declares a 25% profit sharing contribution, the president of the company gets to count the first $230,000 only (2008 limit) and put $57,500 into his account and $7,500 into the clerk's account. For the president, $57,500 represents only 5.75% of total income that grows tax deferred, and if the company wants to provide an additional tax incentive, DC may be an option. Federal income tax rates change on a regular basis. If an executive is assuming tax rates will be higher at the time they retire, they should calculate whether or not deferred comp is appropriate. The top federal tax rate in 1975 was 70%. In 2008, it was 35%. If an executive defers compensation at 35% and ends up paying 70%, that was a bad idea. If the reverse is true, it was brilliant. Unfortunately, only time will tell, but the decision to pay the taxes once the rates have changed is irreversible, so careful consideration must be given. Agreements Plans are usually put in place either at the request of executives or as an incentive by the Board of Directors. They're drafted by lawyers, recorded in the Board minutes with parameters defined. There is a doctrine called constructive receipt, which means an executive cannot have control of the investment choices or the option to receive the money whenever he wants. If he is allowed to do either of those two things or both, he often has to pay taxes on it right away. For example: if an executive says, "With my deferred comp money, buy 1,000 shares of Microsoft stock", that is usually too specific to be allowed. If he