Executive Benefits5 Q&A

A Nonqualified Deferred Compensation (NQDC) plan allows executives to elect to defer a portion of their salary or bonus into a tax-deferred account before taxes are withheld. Unlike 401(k) plans, NQDC plans have no IRS contribution limits, making them particularly valuable for highly compensated executives who want to accumulate substantial tax-deferred wealth beyond the qualified plan thresholds.

A Supplemental Executive Retirement Plan (SERP) is a company-funded defined benefit arrangement that promises executives a specific retirement income supplemental to their qualified plan benefits. Unlike a 401(k), the company — not the executive — makes all contributions and bears investment risk. SERPs are often informally funded through corporate-owned life insurance (COLI) policies.

Corporate-Owned Life Insurance (COLI) is a life insurance policy owned by and payable to the company upon the death of a key employee. Companies use COLI as a tax-advantaged vehicle to informally fund nonqualified benefit liabilities, hedge the cost of executive benefits, and provide key-person protection. The policy's cash value grows tax-deferred, and death benefits are generally received income-tax-free.

A Section 162 executive bonus plan allows a company to pay ('bonus') the premium for a permanent life insurance policy owned by the executive. The company deducts the bonus as compensation, and the executive owns the policy personally. This provides the executive with a growing personal asset funded by the company, without the complexity of a trust or formal plan document.

Nonqualified deferred compensation plans and SERPs can include vesting schedules and forfeiture provisions that create powerful 'golden handcuff' effects. If an executive leaves before a specified date or condition is met, unvested amounts are forfeited — providing a meaningful financial incentive to remain with the organization.