In the past, when small to mid-sized companies tried to effectively compete with larger businesses for top talent, nonqualified deferred compensation plans (NQDC) were off the table or very expensive to implement and informally fund.
This made recruiting and retaining executives all the more difficult. Larger companies had a two-fold advantage. Their benefit packages typically remained more attractive to employees and the NQDC portion of their benefit offerings also allowed large employers to informally fund the plan through tax-efficient corporate-owned life insurance (COLI).
Enter turn-key solutions
Today, the landscape for “the smaller guy” may be changing with the advent of affordably packaged, “turn-key” NQDC solutions informally funded with COLI.
To understand why packaged, turn-key NQDC solutions can be an attractive tool for smaller companies, one needs to understand the complexities of implementing nonqualified plans, what funding options are available, and why deferring income still makes sense for executives today.
Recovering the plan costs
As the average cost of funding employee benefit plans rises, companies of every size are increasingly concerned about the significant effect such liabilities can have on their balance sheets. Because COLI is reported as an asset, it is often a cost-effective method utilized to offset employee benefit liabilities and to provide funds to meet future plan obligations.
According to a 2009 Clark Consulting survey of Fortune 1000 companies, 61% of respondents used COLI as the preferred informal funding vehicle of NQDC plan obligations. In general, COLI grows tax-deferred; and when structured appropriately, this funding approach can provide a tax-efficient asset/liability match, plus positive economic and financial results.
The power of compounding interest