What Bobby Bonilla Day Can Teach Us About Deferred Compensation

Every year on July 1, Bobby Bonilla collects a check for $1,193,248.20 from the New York Mets. It has done so every July 1 since 2011 and will continue to do so until 2035. The date is so well known that baseball fans simply call it Bobby Bonilla Day.

For Mets fans, it’s an annual punch line. For tax people, it’s something else: a reminder that when you get paid can matter almost as much as how much you get paid.

The deal back in the day

Bonilla has not played for the Mets since 1999. In 2000, the team agreed to buy out the remainder of his contract, which was worth $5.9 million. Instead of paying him in one lump sum, the Mets agreed to defer payments until 2011 — and pay interest. Beginning that year, Bonilla would receive annual payments of $1,193,248.20 through 2035. The payments total about $29.8 million.

Separately, Bonilla also receives $500,000 each year through 2028 under another Orioles deferral deal tied to his previous trade.

Paying the $5.9 million immediately would require a large outlay of money. Mets ownership reportedly believed it could earn returns on its investments, including investments with Bernie Madoff, that would exceed the 8% interest rate promised to Bonilla. (Madoff was arrested in 2008 and later pleaded guilty to 11 federal charges, including securities fraud.)

How this relates to everyday taxpayers

Not every company has invested money in what later becomes a Madoff-level mess. But there’s almost always a reason for a postponement, and often, it’s related to cash flow.

Other times, the arrangement may be preferred by the employee. Some employees, especially highly compensated executives, may want to defer income—and potentially tax—to create an informal cash flow focused on retirement, or to avoid receiving a large payment in a year when other income is already high (such as when bonuses are paid).

The goal is to make both sides happy. That’s what happened here—sort of (despite Mets fans). The Mets gained short-term cash flexibility. Bonilla acquired a long-term income stream with an attractive interest rate.

The tax question: When is the income?

For most individual taxpayers, income is taxable when it is actually or constructively received. The real proof is easy — then you get paid.

But you may also be treated as having received income even if you don’t physically have the cash in your pocket through something called constructive receipt. Under applicable law, income may be constructively collected when it is credited to your account, set aside for you, or otherwise made available to you. But income is not considered constructively received if your control is subject to significant restrictions or limitations.

That’s why your paycheck is taxable to you when the company direct deposits it or cuts you a check, even if you put the check in a drawer and choose not to cash it. Qualified pension plans are different because they operate under their own tax rules, including rules that generally defer tax until distribution.

Deferred Compensation

Deferred compensation is compensation earned in one period but paid in a later period. This can be a salary, bonus, buyout or severance package. In the sporting context, as with Bonilla, it can be part of a player contract or buyout of a player contract.

In a typical deferred compensation agreement, you agree to receive money later instead of now. From a tax perspective, for a deferral to work, you generally cannot have current access to the money. Payment must actually be deferred, which means that you generally cannot have an unlimited right to demand payment now. If the money is disposed of, the doctrine of constructive receipt can pull the income into the current year, making it taxable immediately.

Many taxpayers are more familiar with tax-deferred compensation in the form of a qualified plan, such as a 401(k), retirement or profit-sharing plan. These plans are “qualified” because they meet the Internal Revenue Code’s certification rules, generally under section 401(a), and receive favorable tax treatment.

Unauthorized deferred compensation

Not all deferred compensation is created equal. When taxpayers talk about “nonqualified deferred compensation,” they usually mean deferred compensation outside of a qualified retirement plan. It’s often the kind of deal made with executives and athletes that involves buyouts, bonus deferrals, severance or promises by the employer to pay later.

Approved pension plans are regulated to protect funds for the future. However, in many non-qualified deferred compensation agreements, the deferred amount is not in a protected account. It may simply be an unsecured promise to pay in the future. If the employer later runs into financial problems, you may have to line up with other creditors.

Because time matters

Deferred compensation generally does not eliminate tax. It just changes when the tax is due.

Instead of a single large payment in one year, you may receive a series of smaller payments over time. Since our federal income tax system is progressive, grouping income into one year may have a different tax effect than spreading it over multiple years.

In 2026, high earners can reach the top federal income tax rate of 37% when taxable income rises above $640,600 for single filers and $768,700 for married filing jointly. You may also be subject to the additional 0.9% Medicare tax. This is separate from the additional 3.8% Net Investment Income Tax (NIIT) which generally applies to investment income and not compensation. To the extent that a deferred payment agreement involves taxable interest, as here with the payment of interest owed to Bonilla, NIIT will also be affected.

However, over time, you could drop into a lower tax bracket—say, 35% or 32%—or fall below the threshold for the additional 0.9% Medicare tax and the 3.8% NIIT, each of which costs $200,000 for single filers, $250,000 for single filers, $250,000 for filing jointly, and 1 for married. A potential marginal rate savings of several percentage points, spread over years of deferral, can really add up.

It may also matter because your circumstances may change. You may have less other income in future years because you no longer receive a steady salary. Federal income tax rates could increase or decrease. Alternatively, you can retire in a different state with lower tax rates – or no income tax on wages at all (usually Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming).

The employer’s side

There is also the issue of taxation on the employer’s side. Deferred compensation can preserve cash for the employer, but it can also delay the employer’s deduction. In many compensation arrangements, the employer’s deduction corresponds to the employee’s inclusion of the amount in income.

Insert section 409A

There is one more piece for employees and employers to consider. Bonilla’s Mets deal was in 2000—before Section 409A. Section 409A was added by the American Jobs Creation Act of 2004, enacted on October 22, 2004, following the Enron-era deferred compensation scandals. Today, however, similar nonqualified deferred compensation arrangements must comply with Section 409A.

Section 409A generally applies when a service provider has a legally binding right to receive compensation in a later tax year. The statute focuses on how the deferral is made and when the money can be paid. If you don’t follow the rules, deferred amounts may be taxed earlier than expected. There are also additional tax consequences, including an additional 20% tax (you can think of it as a penalty).

Under 409A, an agreement must generally specify in advance the time and manner of payment. It also limits when payments can be made. Allowable payment triggers include separation from service, disability, death, fixed time or fixed schedule, change of ownership or control, and an unforeseen emergency. It also limits acceleration, which means you generally can’t say, “I’m supposed to get paid in 2030, but I’d like the cash now.”

What You Should Know

Bobby Bonilla Day sounds a bit like a dream scenario (again, unless you’re a Mets fan). A player who last appeared for the Mets in 1999 still receives a seven-figure check from the team every July 1st.

But Bonilla didn’t just extend the timing. The Mets agreed to pay him more money later with interest. That turned a $5.9 million acquisition into a long-term payment stream worth about $29.8 million.

We can’t all be Bonillas, but there are some good lessons there. While many of us are fond of saying that we’d rather have a dollar today than a dollar tomorrow, there are times when extending payments makes sense. If done right, a deferral can spread income—and taxes—over years. If done incorrectly, tax may be triggered earlier than expected, with potential additional tax consequences.

Chances are Bonilla worked with his professional advisors to arrange his payments this way. Before you agree to any kind of deferred compensation, take a page from his book and do the same.

ForbesThe World Cup transcends borders. The same applies to tax matters.With Kelly Phillips Erb