Nonqualified Deferred Compensation Plans

Supplemental Executive Retirement Plans, Elective Deferred Compensation Plans
A Supplemental Executive Retirement Plan is an arrangement where an employer agrees to pay additional income to an employee upon death, disability or retirement.

An Elective Deferred Compensation Plan is an arrangement where an employee defers a portion of current income until death, disability or retirement.

Advantages

• Employee is not taxed on income earned until some time in the future.
• Employer can recruit and retain key employees by selectively choosing the participants of the plan.
• Benefits can be designed as "golden handcuffs" to encourage a key employee to continue to work for the employer.
• Most employers can provide unlimited benefits in place of, or in addition to, those receivable under tax-qualified pension or profit sharing plans.*

Why Fund with Life Insurance?
Life insurance is the only vehicle that can assure that the funding will be complete at the death of the employee.

Life insurance generally accumulates on a tax-deferred basis.

Life insurance can be designed so that most employers recover their costs on a tax-free basis.

How Does It Work?

• Employer agrees to pay employee or designated beneficiary supplemental benefits upon death, disability or retirement of employee.
• Employer applies for and is the owner and beneficiary of a life insurance policy insuring employee (Step 1).
• Upon the death, disability or retirement of employee, employer pays the promised benefits to employee or designated beneficiary (Steps 2 and 3).
• Employer recovers cost of implementing plan from the life insurance policy insuring employee (Step 4).

Elective Deferred Compensation

• Employee agrees to defer a portion of current income and employer agrees to pay employee or designated beneficiary Deferred Compensation upon death, disability or retirement of employee (Step 1).
• Employer applies for and is the owner and beneficiary of a life insurance policy insuring employee (Step 2).
• Upon death, disability or retirement of employee, employer pays the promised benefits to employee or designated beneficiary (Steps 3 and 4).
• Employer recovers cost of implementing plan from the life insurance policy insuring employee (Step 5).

*Tax-exempt employers are subject to the requirements of I.R.C. § 457.

This information must not be used for legal or tax advice. Visitors to this web site must consult with their own legal or tax advisor for specific tax advice. This information is excerpted from Northwestern Mutual's The Advanced Planning Library web site.