Where Does Life Insurance Fit in a Nonqualified Deferred Compensation Plan?

Life insurance is the tool of preference to finance an employer’s promises under a nonqualified plan. Typically, the employer purchases a life insurance policy on the life of each covered employee. The employer owns each policy and names itself the beneficiary. The employee is given no rights in the policy and no right to name or change the beneficiary of the policy. In essence, the policy is held as a key employee contract, and will be subject to the same tax rules applicable to all such policies. In order to avoid both tax and ERISA problems, the agreement between the employer and the employee should not mention the life insurance.

Reproduced with permission.  Copyright The National Underwriter Co. Division of ALM

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