(Bloomberg News) Executives with deferred compensation plans have until tomorrow to set aside part of their bonuses and save as much as 9 percent in future taxes.

In addition to the tax break, the plans let highly paid employees circumvent the $22,000 cap on contributions to 401(k) savings plans facing lower-paid workers.

Last year, about 79 percent of chief executive officers at Fortune 100 companies were offered so-called nonqualified deferred compensation plans, according to Equilar, an executive- compensation data firm in Redwood City, California. Depending on the employer's plan, executives and managers may be able to defer an unlimited amount of their salaries or bonuses on a pretax basis until a future date.

"I'm seeing a lot of people considering it," said Robert Barbetti, head of the executive compensation practice at J.P. Morgan Private Bank, a unit of New York-based JPMorgan Chase & Co. "People are anticipating that tax rates are going to go up."

Workers age 50 or older generally may put as much as $22,000 this year into a 401(k) and as much as $6,000 into an IRA, according to Internal Revenue Service rules. That's a fraction of executive pay at the top 50 U.S. financial companies where the average compensation for a CEO rose 26 percent to $11.5 million in 2010, according to Bloomberg Markets magazine's annual ranking of the best-paid CEOs.

Taxes May Rise

That's part of the reason there's more interest in deferral plans, Barbetti said. Another is the potential tax benefits, he said. Participants must pick when they want to receive their compensation and can decide where they'll live when they get it, such as a low-tax state, he said. Executives generally have until June 30 to defer part of their bonuses and until the end of the year to set aside some of their 2012 salaries.

Federal rates on income, capital gains and dividends will rise in 2013 unless Congress acts because tax cuts extended last year are scheduled to expire at the end of 2012. President Barack Obama has proposed letting income-tax rates increase to as much as 39.6 percent from 35 percent for couples making more than $250,000 annually. Capital gains and dividends would be taxed at a top rate of 20 percent, compared with 15 percent. The highest earners also face additional levies on unearned income and wages starting in 2013 to pay for health-care reform.

New York to FloridaExecutives who choose to take distributions from their plans over a period of at least 10 years may save a lot of money if they move from a high-tax jurisdiction such as New York to a non-income tax state like Florida, said Andrew Liazos, a partner at McDermott Will & Emery LLP, who co-chairs the law firm's executive compensation practice. Federal legislation says the state where taxpayers earned deferred compensation such as New York can't tax the income if they've moved to Florida and receive it in equal-installment payouts over at least 10 years.

Starting in 2013, a retired New York executive who receives $400,000 annually over a period of 10 years from his or her plan will be subject to both federal and New York state income tax, with a combined rate of up to 43.7 percent, according to an analysis by J.P. Morgan. That means about $174,800 in taxes.

If the executive moves to a state with no income tax such as Florida or New Hampshire, the $400,000 distribution would only be subject to a federal income tax rate of up to 39.6 percent in 2013 or $158,400 in taxes, the analysis shows. That's a savings of $16,400 annually.

"That's absolutely, positively a play," said William Dunn, a partner at PricewaterhouseCoopers LLP who leads the firm's executive compensation practice. "That's a big deal as the states have been increasing their rates and you look at their budget challenges."

State Taxes

States including Connecticut and Illinois have increased taxes this year, according to the Washington-based Tax Foundation. Connecticut raised its levy on top earners to 6.7 percent from 6.5 percent. The top individual income tax rate is 10.3 percent in California and 8.97 New Jersey, according to the foundation. The top rate in New York state is 8.97 percent until the end of the year when it will revert to 6.85 percent, according to Susan Burns, a spokeswoman for the New York State Department of Taxation and Finance.

More Interest

"We've certainly been seeing more interest from the administration to respond to the deficit problems with increasing rates," said Dunn. "If the Democrats continue to stay in the White House we can expect a push for higher rates and therefore deferred compensation is better off."

Executives who use the plans usually should defer for more than five years to make it worth it, said J.P. Morgan's Barbetti. That's because while money in the account compounds on a pre-tax basis, it's taxed as ordinary income when withdrawn. That compares with earnings on investments outside the plan, which generally are taxed at lower capital gains rates, he said.

The rate of executives participating in nonqualified accounts rose to 42 percent in 2011 from 40 percent the previous year, said Bryant Kirk, chief operating officer at the Newport Group in Heathrow, Florida, which administers 600 executive- benefit plans with $7 billion in plan liabilities and 50,000 participants. The anticipation of larger bonuses and a higher comfort level with their firms' economic health drove the increase, Kirk said.

Employers usually let employees choose investments such as mutual funds and company stock for the money they defer. Some plans also offer a fixed rate of return, said Steve Broadbent, managing director of Fulcrum Partners LLC, an executive benefits consulting firm based in Ponte Vedra Beach, Florida.

Biggest Risk

The biggest risk for executives with a nonqualified plan is if their employer goes bankrupt, said Broadbent. That's because participants are considered unsecured creditors, unlike investors in 401(k)s, he said.

The bipartisan U.S. deficit commission has recommended reducing the amount that can be contributed to 401(k) plans and IRAs to raise revenue. If that happens, those who already defer compensation into nonqualified plans may set aside more to make up for a lower limit, said Liazos of McDermott Will & Emery.

"It is sometimes frustrating that anyone is talking about cutting back on limits that are incredibly meager compared to the massive executive compensation packages that are out there today," Brian Graff, executive director and CEO of the American Society of Pension Professionals & Actuaries in Arlington, Virginia said.

IRS Regulations

IRS regulations set the deadlines for the deferrals. Participants have until June 30, or six months prior to the end of the employer's fiscal year, to defer performance-based compensation such as a bonus they expect to receive in the first quarter of next year. Salary deferrals must be selected prior to the beginning of each calendar year, according to the IRS. Rules in the tax code also require employees to pick a future date for receiving the money and generally prohibit getting it back earlier except in some emergencies.

Failure to follow the IRS rules makes deferred pay immediately taxable as ordinary income and subject to an additional 20 percent income and premium interest tax, McDermott's Liazos said.

"You shouldn't plan on being able to make changes to get your money sooner," Liazos said. "Your ability to unwind it is very limited."