Nonqualified deferred compensation plans funded by corporate-owned and trust-owned life insurance remain highly popular among Fortune 1000 companies. The use of supplemental executive retirement plans, however, slipped from 2004, whereas supplemental disability benefits for executives rose markedly.

These are among the principal conclusions in “Executive Benefits–A Survey of Current Trends, 2005 Results,” published this month by Los Angeles, Calif.-based Clark Consulting. Executives for the firm detailed the study’s findings during an audio/web conference on Dec. 9.

“It is our perception that the popularity of nonqualified deferred compensation plans continues because there is a sustained demand for low-cost corporate plans with the power to recruit, retain and reward a select group of managers or highly compensated employees,” said Les Brockhurst, president of the executive benefits practice at Clark Consulting. “Also, deferred comp plans offer greater flexibility of design as compared to 401(k) plans.”

According to the 2005 survey, 91% of respondents offer a nonqualified deferred compensation plan. That’s a slight dip from the 94% and 93% levels achieved in 2004 and 2003, respectively, but higher than the 86% rate observed from 2000 through 2002.

Executives benefiting most from the plans are at the top of the corporate pyramid: presidents and CEOs, 89% of whom reported being eligible in the 2005 survey. They were followed by executive and senior vice presidents (87%), vice presidents (74%) and division or unit managers (33%).

Fifty-four percent of respondents say their nonqualified plan contains a financial hardship provision that allows for early withdrawals against plan funds. The most prevalent of these include separation of service (100% of respondents), death (88%), disability (69%), specified time (62%), change in corporate control (56%), and hardship (54%). (See chart below.)

IRC Section 409A, which governs nonqualified plans and went into effect in October 2004, allows for plan distributions upon these triggering events–with caveats. The separation of service provision, for example, only can be invoked six months after a key employee’s departure from the firm. Also, 409A prohibits acceleration of the specified time or fixed schedule for paying benefits, as when employing “haircut distributions.”

Susan Linder, general counsel of the executive benefits practice at Clark Consulting, noted that 409A regulations now also restrict changes (subsequent elections) in the form or timing of a benefit payment.

“It’s worth noting that 409A validates the concept of re-deferrals,” said Linder. “From a design standpoint, we believe that plan designs that allow participants to make class year distribution elections for retirement and termination benefit payments will become more prevalent. So, any deferrals made in a given plan year will probably have their own distribution elections attached to them.”

Sixty-one percent of survey respondents said their nonqualified plans permit changes in distribution elections, as compared to 39% who don’t.

The Clark survey notes also that 73% of NQDC plans are informally funded, whereas 24% of plans remain unfunded. Another 3% of respondents are considering informally funding within the next 12 to 24 months.

Corporate-owned and trust-owned life insurance remain by far the most popular funding vehicles for NQDC plans. Seven out of 10 respondents flagged COLI and TOLI as their vehicle of choice in 2005, up from 61% in 2004. The next most commonly used funding vehicles were mutual funds (28%) and company stock (17%).

“The reason COLI enjoys more than twice the funding level for mutual funds is because COLI provides a tax advantage that makes it look more like a 401(k) funding vehicle,” said Brockhurst. “[Plan participants] pay tax on mutual funds but not on cash values that grow inside a life insurance policy. So, from a [profit and loss] perspective, companies find that to be more favorable.”

Still more popular than COLI and TOLI is the rabbi trust: 77% of the 2005 respondents offer this device to protect participants against adverse decisions by plan sponsors. This compares with 15% for springing rabbi trusts, 5% for employer secular trusts and 4% for rabbicular trusts.

The Clark survey recorded similarly high percentages for rabbi trusts, as well as COLI and TOLI, within supplemental executive retirement plans. Whereas firms typically offer deferred comp packages as a defined contribution plan, SERPs generally entail a defined benefit, observed Brockhurst.

Sixty-nine percent of respondents said they have a SERP; the remaining 31% are not considering such plans. Fifty-four percent of those who do offer the plans informally fund them–substantially less than the 73% reported for deferred comp plans. Brockhurst said that’s because the need to “hedge against liability” by informally funding is reduced with respect to SERPs.

Dramatically higher this year relative to prior years is the use of supplemental disability benefits. Fully 81% of respondents reported offering this benefit, up from the 39% posted in 2004. Brockhurst said the high figure reflects a continuing trend, rather than a survey aberration.

“I suspect that by the time we do the survey again next year, the other benefit you will see pop up is long term care. We’re seeing a lot of requests from clients to evaluate LTC benefits, which companies are considering not only for execs, but employees, in general.”