The new "Deferred Compensation" (aka a Roth IRA on steroids) is a compensation arrangement established by employers to provide retirement income and perhaps death and disability benefits to a select employee or a select group of highly compensated employees (or, in some cases, independent contractors). The arrangement is a contractual commitment between an employer (whether a sole proprietor, partnership, LLC, PLC, or corporation) and the participant that specifies when and under what circumstances future compensation will be paid. When properly arranged and administered, the participant (or the participant's beneficiary) can eliminate federal income taxation of the deferred amounts, even when benefits are paid. These assets are also protected from creditors.

Deferred compensation is "nonqualified." These arrangements do not have to be pre-approved by the IRS nor are they generally subject to the qualification requirements applicable to qualified retirement plans. Unlike the participation and eligibility requirements for qualified plans, employers can discriminate in favor of selected employees. Also, when properly arranged, nonqualified deferred compensation arrangements are exempt from the regulatory requirements of ERISA Title I.

A deferred compensation arrangement may provide that an employee will receive a stipulated sum for a fixed period of time (or for life) beginning at the employee's retirement or some other specified trigger date. This is a "defined benefit" type of arrangement. The amounts deferred for the employee's benefit may also be specified in "defined contribution" terms. If an employee dies after payments have begun, the arrangement often directs that the remaining benefits be paid to a designated beneficiary or to the participant's estate.

The arrangement may provide that the employee will receive future compensation as a result of a current salary reduction or in lieu of a bonus or salary increase. This is the traditional or "true deferral" deferred compensation arrangement. In more recent times, another alternative emerged: the salary continuation arrangement. Here, the employer commits to pay future compensation in addition to current earnings, which are not reduced by participation in the arrangement. The family name, "deferred compensation," is often used generically to describe a variety of arrangements.