MLB's Deferred Compensation Practice: How the Dodgers in 2025 Are Getting $241.44 Million Worth of Value by Paying Only $115.61 Million

This article was written for and published in the October 2025 issue of ABA's Entertainment and Sports Lawyer.

No MLB team has utilized deferred compensation contracts more than the Los Angeles Dodgers, with the next closest team being over $800 million behind.[i] With two World Series in the last four years to show for it, the Dodgers’ recent success begs the question: how can the Dodgers get about $241.44 million in value from their top players next year while only paying $115.61 million? It also raises the question of why other teams don’t utilize this function of employment contracts as often as the Dodgers. Lest we forget, sports contracts are ultimately just performance employment contracts. While the numbers are eye-popping compared to normal employment agreements, professional athletes’ contractual negotiations with their employer, the MLB team, must abide by the same regulations, risks, and benefits as any employment contract. This article addresses how the recent MLB deferred compensation contracts fit into the larger legal landscape of employment contracts and associated risks and benefits to players and teams.

I.       Recent use by the Dodgers

This article uses the Dodgers as the backdrop for the discussion on using deferred compensation in the MLB. In recent years, the Dodgers have garnered the most headlines and serve as the quintessential utilizer of this type of compensation structure. But, as will be explained, nothing the Dodgers are doing is improper or unusual—in fact, it is regularly used in the corporate employment world. Even in the MLB, it has been reported that Ted Williams accepted a deferred compensation contract back in the 1950s.[ii] Bobby Bonilla is famously getting paid $1.19 million by the Mets every July 1 until 2035.[iii] The Dodgers, however, have used the practice to a grander and more prolific scale in recent years. For example, here is a rough breakdown of current deferred compensation contracts for rostered Dodgers players, not accounting for variants like opt-outs and signing bonuses:[iv]

 

Player	Contract Total	Deferred Amount	Non-Deferred Amount	Contract Length (Years)	Annual Non-Deferred (Estimate)	Annualized Deferred Amortization
Shohei Ohtani	$700 million	$680 million	$20 million	10	$2 million	$68 million
Mookie Betts	$365 million	$115 million	$250 million	12	$20.83 million	$9.58 million
Blake Snell	$182 million	$65 million	$117 million	5	$23.4 million	$13 million
Freddie Freeman	$162 million	$57 million	$105 million	6	$17.5 million	$5 million
Will Smith	$140 million	$50 million	$90 million	10	$9 million	$9.5 million
Teoscar Hernández[v]	$89.5 million	$31.5 million	$58 million	3	$19.33 million	$5 million
Tommy Edman	$74 million	$25 million	$49 million	5	$9.8 million	$10.5 million
Tanner Scott	$72 million	$21 million	$51 million	4	$12.75 million	$5.25 million
Total Breakdown	$1.7845 billion	$1.0445 billion	$740 million		$115.61 million	$125.83 million

How can the Dodgers this season pay these players only $115.61 million and defer $125.83 million until later?

II.    MLB’s Use of Deferred Compensation Contracts

Employment contracts in general are governed by state contract law, and federal and state labor, employment, and tax law.[vi] In the MLB context, another consideration is the Collective Bargaining Agreement (“CBA”) between the 30 MLB Clubs and the MLB Players Association—the governing “law” of the MLB.

A.    Background on deferred compensation.

Deferred compensation is a common payment structure in the corporate world. At the federal level, compensation generally is governed by the Internal Revenue Code of 1986, as amended (the “Code”). Compensation is taxed in the year it is constructively received. Constructive receipt is based on the principle that income is received or realized by cash method taxpayers when it is made subject to the will and control of the taxpayer and can be, except for his own action or inaction, reduced to actual possession. Code 404, however, “creates a special set of tax rules to govern deferred compensation.”[vii]

Deferred compensation, under these regulations, falls under two categories: qualified deferred compensation plans and non-qualified plans. Both carry with them varying degrees of legal requirements and tax benefits. The Code defines  “qualified deferred compensation plans” as “one in which payments are made to an employee from certain trusts, annuity plans, pensions, exempt government deferred compensation plans, supplemental pension benefits, and ‘cafeteria plans’ subject to certain qualifications.”[viii] Qualified plans include 401(k) and 403(b) retirement plans and pensions.[ix] These plans are controlled by both the Code and the Employee Retirement Income Security Act (“ERISA”). Under ERISA, employers are required to run the plan solely in the best interests of plan participants and beneficiaries. Under the Code, money put into the plan (contributions) and money taken out of the plan (distributions) are subject to certain restrictions. For example, contribution limits are set each year by the Internal Revenue Service, and  distributions generally cannot be taken penalty-free until age 59 ½.[x] Qualified deferred compensation plans are not the type used by the Dodgers to defer its contracts with its star players.

Nonqualified plans, on the other hand, are far less regulated. This lack of regulation grants more freedom to the parties but comes with associated risks. The Code defines nonqualified deferred compensation plans as “any plan or other arrangement for deferral of compensation other than a plan described in [§ 3121](a)(5).”[xi] In other words, nonqualified plans are essentially written agreements made between an employer and an employee wherein the employer withholds the employee’s pay until a later date.

Nonqualified deferred compensation plans are generally not subject to ERISA. As well, the strict contribution and distribution limitations imposed on qualified plans under the Code do not apply. However, to take advantage of the benefits provided under the Code, nonqualified deferred compensation must be subject to the risk of  company creditors and employer bankruptcy.

Nonqualified deferred compensation plans are subject to Code Section 409A.[xii] While Section 409A does not place many limitations on the parties’ ability to negotiate a nonqualified deferred compensation, it does place a heavy tax penalty if the contract fails to comply with the few limitations it provides. The main limitations in Section 409A are two-fold: (1) “you cannot speed up the time or form of the payment of your deferred compensation,” and (2) “you cannot slow down, or delay, the time or form of the payment of your deferred compensation.”[xiii] Payment is only permitted upon certain events: death, disability, an unforeseeable emergency, separation from service and change in control, or at a specified time or pursuant to a fixed schedule.

Failure to comply with Section 409A means that “all compensation deferred under the plan for the taxable year and all preceding taxable years shall be includible in gross income for the taxable year to the extent not subject to a substantial risk of forfeiture and not previously included in gross income.”[xiv] That increased gross income is then taxed at 20% plus interest.[xv] For reference, last year, if after 5 years with the Dodgers, should the Dodgers and Ohtani be in breach of Section 409A, then Ohtani would be immediately responsible for 20% of his $340 million current contract value ($68 million/year), which is $68 million in tax penalties plus interest.

Many of the deferred compensation contracts utilized by MLB teams, therefore, are subject to Section 409A restrictions. But these restrictions are not very onerous and provide parties ample room to negotiate timing, form, and contributions in deferred compensation. That said, not all nonqualified deferred compensation is subject to Section 409A. There are a few exceptions, including what is referred to as a short-term deferral, often used in the sports context.

To qualify for the short-term deferral exception, the payment must be required and actually made “on or before the 15th day of the third month following the end of the employee’s tax year or the employer’s tax year, whichever is later, in which the right to the payment vests.”[xvi] Put another way, the payment must be made when there is no longer “a substantial risk of forfeiture.”[xvii] In sports contracts, non-guaranteed compensation contracts often qualify as short-term deferrals. For example, if the Dodgers agree to pay a player $500k if he plays for the Dodgers until 2030, then the right to the payment ($500k) vests at the end of 2030. The deferred compensation is considered subject to a substantial risk of forfeiture until 2030 because the player will not get any of the $500k if he leaves the Dodgers before 2030. Under the short-term deferral exception, if the Dodgers pay all the $500k prior to March 15, 2031, the compensation will not be subject to 409A. Another example would be compensation tied to meeting a performance metric, like hitting a predetermined amount of homeruns or pitching a no-hitter.

B.     The CBA

While the specific terms of most MLB player contracts are not public, the CBA controls various terms and requirements for these deferred compensation contracts. The purpose of the CBA “is to set forth” an agreement between the Clubs and Players Association “on certain terms and conditions of employment of all Major League Baseball Players . . . . Each of the Parties acknowledges the rights and responsibilities of the other Party and agrees to discharge its responsibilities under this Agreement.”[xviii] Although this article cannot analyze particular terms of deferred compensation contracts, the CBA broadly demonstrates how these contracts function.

Article XVI of the CBA specifically provides for deferred compensation, notably with no limits. It says, “There shall be no limitations on either the amount of deferred compensation or the percentage of total compensation attributable to deferred compensation for which a Uniform Player’s Contract may provide.”[xix] The CBA requires the Club to fully fund “the present value of the total deferred compensation obligation,” but it gives clubs a two-year grace period before having to front the funds.[xx] Fully funded means “the current present value of the then outstanding deferred payments, discounted by 5% annually.”[xxi] That 5% discount rate can be negotiated later by the player and Club based on the stock market fluctuations. That discount assumes that the 95% amount, invested prudently by the Club, will grow 5% to cover 100% of the deferred amount by the final distribution date.

The CBA gives Clubs freedom to invest the 95% as it sees fit, provided that the amount is earmarked for the player and remains rather liquid. A player’s agreement, of course, may provide otherwise, or require with more specificity how that money is put aside. Unless a player’s contract provides otherwise, a Club may fully fund the deferred compensation amount “in such manner as it elects.”[xxii] The only restrictions are that the Club must essentially earmark the funds “exclusively for the uses and purposes of satisfying the deferred compensation obligation(s),” and keep the funds rather liquid, “in the form of unencumbered assets comprising cash or cash equivalents and/or registered and unrestricted readily marketable securities.”[xxiii] That said, the funds are “subject to the claims of the Club’s general creditors.”[xxiv] The CBA provides for various compliance measures whereby the Player’s Association can monitor the Club’s funding obligations.[xxv]

Use Ohtani again as a general example. He deferred $68 million annually, which means that the Dodgers need only put up 95% of that amount: $64,600,000. These numbers are general and meant for illustration purposes only, not accounting for other detailed net or actual present valuation. Using these raw numbers, Ohtani’s contract alone frees up $3.4 million in cash for the Dodgers to move around, on top of the two-year grace period the Dodgers can take into account. Likewise, there is no restriction in the CBA saying the Dodgers cannot make more than 5% return on the invested $64,600,000, as long as Ohtani gets his annual valuation of $68 million at the end of the term.

It’s worth emphasizing what a club can do with an extra $3.4 million. While it might be dwarfed by Ohtani’s record setting $70 per year salary, most MLB contracts are nowhere near that high.  For example, future hall of famer pitcher Clayton Kershaw just resigned with the Dodgers for $7.5 million in 2025. Almost half of Kershaw’s salary alone can be covered by the money saved on Ohtani’s deferred salary. As a further illustration, the $3.4 million saved might seem trivial compared to the Dodgers’ total payroll of $303,851,665, composing roughly (roughly 1.12%).[xxvi] But when compared to the payroll of the lowest payroll team, the Marlins at $43,630,000, that $3.4 million goes much further (roughly 7.79%).[xxvii]

Ohtani benefits too. He probably has more control over tax payments. While the specific terms of the contract are not public, Ohtani will have to pay taxes on the deferred compensation based on the payment date provided in his contract. To avoid having to pay tax on the entire $680 million in one year, the contract likely provides that the $680 million is paid in installment or on a fixed schedule (e.g., monthly, quarterly, yearly). All the while, he and the Dodgers can invest and earn interest on that deferred amount. On top of that, with the extra cash in the Clubs’ hands, Ohtani and any other stars who decide to live on less of a salary (plus endorsement deals) hope that their teams will be able to structure spending in such a way to guarantee more championships.

Given the protections provided by the CBA, it seems like a win-win for individual Clubs and players. The Clubs are in better control of immediate finances, and still have to put aside most of the deferred compensation today. The players have assurance that the money is earmarked for their benefit, and barring their team going bankrupt, can access the full fund at the end of the deferred.

C.    Luxury Tax

A final consideration when reviewing the MLB’s practice of deferred compensation is its effect on the rest of the league. The Dodgers have been one of the most, if not the most, successful franchises in the last 10 years, but how much of that success is due to the use of deferred compensation contracts? Likely none. First, any club and player can utilize the freedom provided by deferred compensation, not just the extremely wealthy. In fact, smaller market teams might consider it a competitive equalizer to free up immediate cash to pursue bigger stars.

Second, and a factor often misconstrued, the use of deferred compensation does not have a material effect on the Competitive Balance Tax (“luxury tax”).[xxviii] The CBA calculates the deferred salary into the total annual amount for luxury tax purposes. A club’s luxury tax is levied if the club’s “Actual Club Payroll” exceeds the “Base Tax Threshold.”[xxix] The Actual Club Payroll is determined based on “the sum of the yearly Salaries . . . attributable to that Contract Year of all Players under a Uniform Player’s Contract with the Club for that Contract Year.”[xxx] A Uniform Player’s Contract, in turn, is calculated based on “Average Annual Value” (“AAV”) of the player’s total contract.[xxxi] Importantly, AAV is calculated as follows: “the sum of (a) the Base Salary in each Guaranteed Year plus (b) any portion of a Signing Bonus . . . plus (c) any deferred compensation or annuity compensation costs attributed to a Guaranteed Year.”[xxxii]

Therefore, the clubs using deferred compensation contracts do not avoid luxury tax responsibility for the current annual value of that deferred compensation. In other words, the MLB still calculated Ohtani’s $68 million deferred value into the Dodgers’ Actual Club Payroll when determining its luxury tax under CBA Article XXIII.[xxxiii]

III. Conclusion

This article delves into the history and implications of deferred compensation in Major League Baseball, highlighting the Los Angeles Dodgers’ recent strategic use of deferrals. While the practice of deferred compensation contracts is not new to the sports world or the corporate employment world, the Dodgers have seemingly perfected the tactic, using it to create financial flexibility and increase their competitive ability in baseball. Considering the freedoms provided by the Internal Revenue Code for unqualified deferred compensation contracts, other teams might benefit from emulating the Dodgers’ strategy.

[i] Alden Gonzalez, Dodgers defend record spending, unprecedented deferred deals, ESPN (Dec. 7, 2024), https://www.espn.com/mlb/story/_/id/42815541/mlb-offseason-2024-25-free-agency-los-angeles-dodgers-deferrals-1-billion-snell-ohtani.

[ii] Dan Freedman, A Deep Dive Into Deferred Contracts From The 1950s To Today, Forbes (Dec. 12, 2024), https://www.forbes.com/sites/danfreedman/2024/12/12/a-deep-dive-into-deferred-contracts-from-the-1950s-to-today/.

[iii] Dan Mullen, Bobby Bonilla Day: Why New York Mets pay $1.19M every July 1, ESPN (July 1, 2024), https://www.espn.com/mlb/story/_/id/40430232/bobby-bonilla-day-2024-new-york-mets-pay-119-million-every-july-1-ohtani-contract-deferred-money.

[iv] Gabe Smallson, How Much Deferred Money Have The Dodgers Given Out in Contracts?, Dodgers Nation (Jan. 28, 2025), https://dodgersnation.com/how-much-deferred-money-have-the-dodgers-given-out-in-contracts/2025/01/28/; Freedman, supra note 2.

[v] Hernández’s contract is a bit more complicated, due to a carryover deferred amount from the 2024 season, prior to his current three-year deal with the Dodgers. For more details, see Eric Stephen, Teoscar Hernández contract details on Dodgers return, True Blue LA (Jan. 13, 2025), https://www.truebluela.com/2025/1/13/24337422/teoscar-hernandez-contract-details-dodgers.

[vi] See MacGinnitie v. Hobbs Grp., LLC, 420 F.3d 1234, 1241 (11th Cir. 2005).

[vii] Avon Prods., Inc. v. United States, 97 F.3d 1435, 1438 (Fed. Cir. 1996).

[viii] Hoerl & Assocs. v. United States, 996 F.2d 226, 228 (10th Cir. 1993); 26 U.S.C. § 3121(a)(5).

[ix] 26 U.S.C. § 401.

[x] Id. § 401(k)(2)(B)(i)(III).

[xi] Id. § 3121(v)(2)(C).

[xii] Id. § 409A.

[xiii] Deferred Compensation Considerations Within Employment Agreements, Dentons (Mar. 1, 2019), https://www.dentons.com/en/insights/newsletters/2019/march/1/dentons-davis-brown-employment-law/deferred-compensation-considerations-within-employment-agreements.

[xiv] 26 U.S.C. § 409A(a)(i)(A).

[xv] Id. § 409A(a)(i)(B).

[xvi] Use of Short-Term Deferral Exception to Avoid Section 409A, Loeb & Loeb LLP (May 2007), https://www.loeb.com/en/insights/publications/2007/05/use-of-short-term-deferral-exception-to-avoid-se__.

[xvii] Id.

[xviii] Collective Bargaining Agreement, 2022–2026 Basic Agreement (“CBA”), art. I, p. 1, available at https://www.mlbplayers.com/_files/ugd/4d23dc_d6dfc2344d2042de973e37de62484da5.pdf.

[xix] Id. art. XVI, p. 89.

[xx] Id. (requiring the compensation “on or before the second July 1 following the championship season in which the deferred compensation is earned”).

[xxi] Id.

[xxii] Id. art. XVI, p. 90.

[xxiii] Id.

[xxiv] Id.

[xxv] Id.

[xxvi] Shane Jackson, MLB Teams With Highest 2025 Payrolls: Dodgers on Top, Bet MGM (Feb. 5, 2025), https://sports.betmgm.com/en/blog/mlb/mlb-teams-highest-payrolls-2023-bm15/.

[xxvii] Id.

[xxviii] CBA, art. XXIII (Competitive Balance Tax), p. 115.

[xxix] Id. § B(1), p. 117.

[xxx] Id. § C(1)(c), p. 122.

[xxxi] Id. § E(2), p. 131.

[xxxii] Id.

[xxxiii] Id. § B(1), p. 117.