Business owners who want the advantage of a defined benefits plan, but also want to minimize the risk, might consider a non-qualified deferred compensation plan, says Paul Dorf, managing director with Compensation Resources, a compensation consulting firm in Upper Saddle River. "A company may withhold and invest a percentage of an employee's income. The level of the periodic distributions, which generally commence with retirement, may be contingent on such factors as length of service or the company's financial performance," explains Dorf. "Because the plan is not qualified and is not subject to ERISA requirements, participation can be limited to highly paid key employees. The plan must meet guide lines of the Internal Revenue Service, but there is virtually no limit on income or on the percentage of salary selected for contribution."

Dorf notes that deferred compensation is considered an asset of the company. If the firm goes bankrupt, it may be seized and held for creditors. Additionally, because this type of plan is non-qualifying, the business will not realize a current tax deduction for the withheld compensation. While other plans do exist, like a cash balance plan, selecting the best option may be tricky. This decision deserves careful consideration.