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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 — employerEmployer contributions consist of premium paymentsNo deduction allowedNQDC accounts maintained on paper onlyEmployer contributions consist of premium paymentsNo deduction allowedNQDC accounts maintained on paper onlyEmployer contributions consist of premium paymentsNo deduction allowedNQDC accounts maintained on paper only
Consequences of dollars contributed — employeesNo taxable incomeEmployee taxed annually on value of policy death benefit payable to employee’s beneficiary, less employee’s contributionNo taxable income
Tax consequences during accumulation periodGenerally, cash value builds tax deferredC Corporations may be subject to alternative minimum tax (AMT), in which case cash value build-up may be taxedGenerally, cash value builds tax deferredC Corporations may be subject to alternative minimum tax (AMT), in which case cash value build-up may be taxedAn 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 creditorsEmployer 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 creditorsAccess 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 obligationsPayment of distribution will generally be made from employer cash flow and general assetsEmployer may borrow against policies or withdraw cash value to meet obligationsCash flow from annuity may pay for distribution, or employer may access cash value
Tax considerations upon distribution — employerEmployer may deduct full amount of NQDC plan benefit paymentsEmployer may deduct full amount of NQDC plan benefit paymentsEmployer may deduct full amount of NQDC plan benefit payments
Tax considerations upon distribution — employeeAmount received is taxable income to employeeAmount received is taxable income to employeeAmount 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)
*Caution:In certain cases, split dollar life insurance may be considered nonqualified deferred compensation subject to the special tax rules contained in IRC Section 409A.
**Caution:Accessing assets during the accumulation period may have income tax consequences. Policy loans and withdrawals will reduce the policy’s cash value and death benefit.
***Caution:The Pension Protection Act of 2006 limits the amount an employer can receive as a tax-free death benefit from a COLI contract in certain circumstances.
Note:Annuities are long-term tax-deferred investment vehicles intended to be used for retirement purposes. Any gains in tax-deferred investment vehicles, including annuities, are taxable as ordinary income upon withdrawal. For variable annuities, investment returns and the principal value of the available sub-account portfolios will fluctuate based on the performance of the underlying investments so that the value of the investor’s units, when redeemed, may be worth more or less than their original value. Any guarantees are subject to the financial strength and claims-paying ability of the issuing insurance company.

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