A non-qualified deferred compensation plan is a way for executives and other top-earning employees to delay taxes on income beyond what they can do with regular retirement plans, like a 401(k). Life insurance is one way to fund these arrangements. With this system, employees can delay taxes while building future retirement income, and employers are covered in case the key employee passes away. Here's an overview of how this strategy works and the rules.

Non-Qualified Deferred Compensation Plans

A non-qualified deferred compensation plan is a bindin🅰g contract between an employer and an employee where the employer agrees to pay the employee at a la෴ter time. The employer makes an unsecured promise to pay an employee's future benefits, subject to the specific terms of the contract. Rather than receiving a salary right away and owing taxes, the employee delays their compensation for the future when they might be in a lower tax bracket. Their earnings can continue growing as well with the plan.

With 澳洲幸运5官方开奖结果体彩网:non-qualified deferred compensat🅰ion plans, an employer can offer bonuses, salaries, stock options, retirement plans other than 401(k)s, and other kinds of compensation without having to make the payments right away.

These types of plans differ substantially from qualified plans, like a 401(k), which have stricter rules investors must follow and typically have an income cap. Non-qualified deferred compensation plans have no income or contribution limits. Employers can set their own limits to these plans. Employees can also defer as much income as they want versus the annual contribution limits on 401(k)s and other retirement plans.

Funding Non-Qualified Deferred Compensatio☂n Pඣlans

Non-qualified deferred compensation plans are unfunde✨d plans that are broken into two parts:

• The first part is the plan itself, which is equivalent to the contractual agreement between the employer and employee.
• The second part is the employer's general asset reserve that finances the future liabilities created by the plan.

The general asset reserve is what the employer uses to pay the employee for future benefits.

The general asset reserve is required by 澳洲幸运5官方开奖结果体彩网:generally accept🍸ed accounting principles (GAAP)൲ and can be tax🃏able assets such as mutual funds or employer-owned life insurance. The plan is the legal benefit between the plan participant (the employee), and the plan sponsor (the employer). The plan outlines the overall benefits, distribution schedule, and vesting and forfeiture stipulations.

Life Insurance and Non-Quꩲalified Deferred Compensation Plans

Employers can use life insurance to fund their future owed payments in deferred compensation plans and to help the employee build more wealth. For example, the employer could buy a variable life insurance policy on a key employee using a deferred compensation plan.

The variable🌞 life insurance policy would build cash value over time. The employee could choose how to invest the variable life insurance cash value between a variety of inꦆvestment funds. The money would grow tax-deferred while in the life insurance policy.

If the employee dies before retiring, the employer would use the variable life insurance death benefit to cover the agreed payments in the deferred compensation plan. On the other hand, if the employee reaches the 澳洲幸运5官方开奖结果体彩网:target retirement age for the deferred compensation ཧplan, they would receive the cash value as well as any other agreed payouts for the d🦩eferred compensation plan.

Types of Plans That ♌Allow Life Insurance Funding

Two main non-qualified deferred compensation plans allow 澳洲幸运5官方开奖结果体彩网:life insurance funding: 澳洲幸运5官方开奖结果体彩🐻网:supplemental executive 🐟retirement plans (SERPs) and 澳洲幸运5官方开奖结果体彩网:corporate-owned life insuraꦬnce (COLI). SERPs are similar to defined-benefit pension plans and give an employee a stated benefit provided by the employer at the time of retirement.

With COLI, companies purchase life insurance policies for employees whom they wish to compensate. The company pays the premium on the life insurance policies and then pays out benefits to the employees when they retire.

The Bottom Line

Funding a non-qualified deferred compensation with life insurance can be a useful tax planning strategy but is also a complicated one. Anyone using this strategy should work with a retirement plan expert to make sure the arrangement is structured properly. Employees should also carefully consider the possible risks of non-qualified deferred ๊compensation, suc✱h as what happens to the money if their employer goes bankrupt.