If NQDC informally funded with: | Corporate Owned Life Insurance (COLI) | Split-Dollar Life Insurance*(Example: Employer owns policy, pays all or part of annual premium, and is entitled to receive — upon death or surrender — amount equal to policy’s cash surrender value) | Corporate Owned Annuities |
Consequences of dollars contributed — employer | Employer contributions consist of premium paymentsNo deduction allowedNQDC accounts maintained on paper only | Employer contributions consist of premium paymentsNo deduction allowedNQDC accounts maintained on paper only | Employer contributions consist of premium paymentsNo deduction allowedNQDC accounts maintained on paper only |
Consequences of dollars contributed — employees | No taxable income | Employee taxed annually on value of policy death benefit payable to employee’s beneficiary, less employee’s contribution | No taxable income |
Tax consequences during accumulation period | Generally, cash value builds tax deferredC Corporations may be subject to alternative minimum tax (AMT), in which case cash value build-up may be taxed | Generally, cash value builds tax deferredC Corporations may be subject to alternative minimum tax (AMT), in which case cash value build-up may be taxed | An annuity contract held by a corporation, partnership, or other “non-natural person” generally will not qualify as an annuity for federal income tax purposesAll income on the contract is taxable to employer |
Access to assets during accumulation period** | Employer can withdraw cash valueEmployer can borrow against policy (generally no deduction allowed for interest on loans totaling more than $50,000 per insured)Policy may be subject to claims of creditors | Employer can withdraw cash valueEmployer can borrow against policy (generally no deduction allowed for interest on loans totaling more than $50,000 per insured)Policy may be subject to claims of creditors | Access depends upon terms of annuity contractPolicy may be subject to claims of creditors |
Can employee direct investment of assets during accumulation period? | “Earnings” on paper account could be based on employee-directed investment of phantom dollars | “Earnings” on paper account could be based on employee-directed investment of phantom dollars | “Earnings” on paper account could be based on employee-directed investment of phantom dollars |
How are distributions made from nonqualified deferred compensation plan? | Payment of distribution will generally be made from employer cash flow and general assetsEmployer may borrow against policies or withdraw cash value to meet obligations | Payment of distribution will generally be made from employer cash flow and general assetsEmployer may borrow against policies or withdraw cash value to meet obligations | Cash flow from annuity may pay for distribution, or employer may access cash value |
Tax considerations upon distribution — employer | Employer may deduct full amount of NQDC plan benefit payments | Employer may deduct full amount of NQDC plan benefit payments | Employer may deduct full amount of NQDC plan benefit payments |
Tax considerations upon distribution — employee | Amount received is taxable income to employee | Amount received is taxable income to employee | Amount received is taxable income to employee |
Upon death of employee*** | Policy death benefit paid to employerPolicy death benefit generally not taxable (may be included in C Corp’s alternative minimum tax (AMT))Any unpaid NQDC plan benefits paid to employee’s beneficiary (taxable income to beneficiary) | Amount equal to cash-surrender value of policy paid to employer, with remaining death benefit paid tax free to employee’s beneficiaryAny unpaid NQDC plan benefits paid to employee’s beneficiary (taxable income to beneficiary) | Any unpaid NQDC plan benefits paid to employee’s beneficiary (taxable income to beneficiary) |