Your small business clients know that once they've secured top talent, it's important to keep those individuals happy. One way to show them they're appreciated is with a nonqualified deferred compensation plan (NQDC) funded with life insurance.

How this plan works

With a nonqualified deferred compensation plan, the employer gives the key employee the opportunity to save for retirement through salary deferrals, company contributions, or a combination of both.

Diagram of how a nonqualified deferred compensation plan works, during the key employee’s working years; description below. With this plan, the key employee and the employer enter into a legal agreement that defines the nonqualified deferred compensation plan’s features, benefits and requirements. During the key employee’s working years, the employee can elect to defer a specific dollar amount or percentage of future compensation and chooses how those deferred dollars should be allocated among a variety of investment choices. As outlined in the agreement, the employer may also make contributions, including via paying premiums on a life insurance policy for the employee, but those premiums and other contributions are not tax deductible. All contributions are credited to the employee’s deferred compensation account, along with any gains or losses.
Diagram of how a nonqualified deferred compensation plan works, upon the retirement of the key employee; description below. Upon the key employee’s retirement, the employee takes distributions from the deferred compensation account to supplement retirement income. The retired employee pays taxes on that taxable income, potentially at a lower tax rate, while the employer takes a tax deduction. When the retired employee dies, his or her beneficiaries receive the death benefit from the life insurance policy but must pay tax on the survivor benefit.

Potential benefits of the plan

  • It's both a recruiting and retention tool for employees who are specialized or value employees
  • It has less administration and fewer filing requirements than qualified retirement plans subject to ERISA
  • It lacks the contribution limitations and regulatory rules associated with traditional qualified retirement plans
  • The plan accommodates corporate contributions, salary deferrals, or a combination of both
  • The business gets to take a tax deduction when an employee receives distributions from the plan
  • The corporation as the beneficiary will receive the death benefit from the life insurance, which can be used to recover costs
  • It offers flexibility in plan design to meet specific needs

Drawbacks of the plan

  • There are no immediate tax deductions for the employer
  • Plan documentation and ongoing administration are required
  • The plan must comply with Internal Revenue Code Section 409A


Have small-business clients but don’t know which life insurance solution is right for their business? Answer a few questions and get a recommendation from the Nationwide Small Business Solutions Analyzer.

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As situations change, so will the business's life insurance needs. Care should be taken to ensure these strategies and products are suitable for the business's and the client's long-term goals. Weigh the business's objectives, time horizon and risk tolerance as well as any associated costs before investing. Also, be aware that market volatility can lead to the possibility of the need for additional premium in the policy. Variable life insurance has fees and charges associated with it, which include costs of insurance, underlying fund expenses and administration fees. Investing involves risk, including possible loss of principal. Nationwide and its representatives do not give legal or tax advice. An attorney or tax advisor should be consulted for answers to specific questions.

Variable life insurance has fees and charges associated with it that include costs of insurance that vary with such characteristics of the insured as gender, health and age, underlying fund charges and expenses, and additional charges for riders that customize a policy to fit their individual needs. Variable products are sold by prospectus. You can obtain the product prospectus and underlying fund prospectuses by writing to Nationwide Life Insurance Company, P.O. Box 182021, Columbus, OH 43218-2021. Before you invest, you should read the prospectus carefully and consider investment objectives, risks, charges and expenses. The product prospectus and underlying fund prospectus contain this and other important information.

Loans and withdrawals will reduce the death benefit. Most distributions will be taxed on a first-in/first-out basis, as long as the contract is not a modified endowment contract (MEC) according to Section 7702A of the Internal Revenue Code. Loans from a MEC are generally taxable and subject to a 10% tax penalty if taken before age 59 1/2. If the policy lapses with a loan outstanding, it will be treated as a distribution and some or all of the amount may be taxable.

Guarantees and protections are subject to Nationwide's claims-paying ability. They do not apply to the investment performance or safety of the underlying investment options.

Investment products are not FDIC-insured, may lose value and have no bank guarantee.