How does deferred compensation use life insurance in Nevada businesses?

Non-qualified deferred compensation (NQDC) plans allow Nevada businesses to defer a portion of an executive's compensation to a future date—typically retirement—funded informally through company-owned life insurance (COLI).

The business purchases a permanent life insurance policy on the executive's life, owns the policy and cash value, and uses the policy's performance to informally offset future compensation obligations. The executive benefits from a retirement income stream without the contribution limits that apply to 401(k) plans. The business retains the policy assets on its balance sheet as a company asset.

This structure is popular in Nevada's gaming, hospitality, and professional services sectors, where recruiting and retaining high-earning executives requires benefits packages beyond what qualified retirement plans allow.

Important structural requirements apply. Section 409A of the Internal Revenue Code imposes strict rules on timing elections, distribution schedules, and plan documentation. Violations can result in immediate taxation plus a 20% penalty. Plans must be documented and executed properly from the outset.

Because NQDC plans carry unsecured creditor risk for the executive—the life insurance is a company asset and subject to creditor claims if the business fails—Rabbi Trust structures are sometimes used to provide a measure of security. Agents in our network can connect you with qualified ERISA and tax counsel to ensure your plan is properly designed.