Non-qualified Plans
A deferred compensation plan is an arrangement in which an employee or owner defers some portion of their current income until a specified future date. Wages earned in one period are actually paid at a later date. Life insurance can be used to informally fund a deferred compensation plan. The deferred amounts can be used to pay premiums on cash value life insurance. The cash value can then be available at retirement to supplement other income or, if the insured dies before retirement, the insured’s designated beneficiary would receive the insurance policy’s death benefit.
A non-qualified deferred compensation plan gives the employer the power to pick and choose among the recipients as long as they are all highly compensated or management employees without regard to years of service, salary level or any other criteria. It also allows a business to provide benefits to officers, executives and other highly paid employees as part of an executive benefits package. With a non-qualified plan the amounts of the employer’s contributions are not limited. There are no significant filing or reporting requirements.
A non-qualified plan does not, however, receive favorable tax treatment at the time it is given. The employer is not entitled to tax deductions until the benefits are actually paid to the employee.