Digging into COLI Funding Options for NQDC Plans: Pros and Pitfalls to Avoid

by Prof. Robert Bloink and Prof. William H. Byrnes

Nonqualified deferred compensation plans (NQDC plans) provide a powerful option for employers who are looking to attract and retain valuable employees—allowing those employees access to an additional source of tax-deferred retirement dollars. NQDC plans are not subject to the contribution limits applicable to traditional qualified plans, expanding the saving potential for high earning taxpayers. On the flip side, NQDC plans don’t meet ERISA requirements—so that they aren’t funded through establishment of dedicated accounts for participants, and they aren’t protected from the employer’s creditors in bankruptcy. In the end, the lack of ERISA protections means that funding the plan must be accomplished differently—and many clients may wish to explore the corporate owned life insurance (COLI) option as a tax-preferred funding alternative to other typical approaches.

NQDC Plans: Background