When a company (or employer) decides to implement a NQDC plan:

1

Highly paid employees opt to defer a portion of their compensation into a nonqualified plan, allowing them to invest their notional1 accounts to meet their future retirement needs.

2

The employer uses the deferred compensation to informally fund life insurance premiums that offset the plan liability (employee deferred compensation accounts) on their balance sheets.

3

The employer works with a financial professional, third-party administrator and Nationwide to design a custom solution using corporate-owned life insurance (COLI) to offset the liability and offer tax-deferred growth.

4

A financial planner works with Nationwide to determine how to meet the employer's unique needs with the right COLI product, such as a nonqualified deferred compensation plan, supplemental executive retirement plan with a defined benefit or a supplemental executive retirement plan with a defined contribution.

Although the main reason to purchase life insurance is the need for death benefit protection, in this arrangement, your company uses deferrals to pay premiums on corporate-owned life insurance policies.
Advantages Disadvantages
  • Tax-deferred policy gains — Increases in the policy cash value aren’t taxed
  • Tax-free death benefits — Your company received the death benefits tax free and can use them to offset plan costs
  • Variable universal life offers a wide array of investment options from well-known fund families
  • Some plan designs may not qualify for guaranteed-issue underwriting, so there is the potential for medical underwriting
  • Life insurance has fees and charges associated with it, including costs of insurance that vary with the sex, health and age of the insured, as well as underlying fund charges and expenses
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[1] This account is “notional” in the sense that it exists only on paper or in accounting records to track the deferred amounts and any investment returns based on the performance of selected investment options. No actual assets are set aside in separate accounts for the employee.