Deferred income can fund retirement.

If you're a high-income business owner or executive or even a well-paid middle manager, you may have a more difficult time saving for retirement. A little-publicized, but significant, change in the tax act lowered the maximum mount of compensation that can be taken into account when calculating contributions to tax-deferred retirement plans such as the popular 401(k). Prior to the 1993 tax act, the maximum salary on which retirement contributions were based was $235,840. That was lowered to $150,000 in 1994,

What the lower cap effectively means is that top-paid executives and business owners may not be able to contribute as much to their qualified retirement plan as they did before. The lower cap may reach as deep as middle managers, because it can affect what is known as nondiscrimination rules, basically ensuring that highly paid employees don't defer a significantly higher percentage of their salary into a qualified retirement plan than all remaining employees. Some companies are finding the lower salary cap so restrictive they are dropping their tax-qualified retirement plans for all their workers.

The number of employees affected by the lower cap will increase substantially, according to retirement benefit specialists. At one large company, 1,000 executives were affected by the old cap; under the new cap, 4,000 will be.

To supplement this shortfall, companies are turning to less restrictive "nonqualified benefit plans," also known as deferred compensation plans. These allow higher-paid employees to defer income, just like under 401(k), but without many of the protections.

Deferred...