This article compares and contrasts four approaches to defined-contribution nonqualified deferred-compensation arrangements funded with cash value life insurance. The author briefly reviews the traits of each approach, then using life insurance illustrations, provides a mathematical comparison of them. Then, the author reviews some of the nonmathematical considerations to each approach. Finally, the author briefly reviews how three of the alternatives might mitigate or completely avoid the 21 percent tax imposed on compensation paid to employees in excess of $1 million by the newly passed IRC §4960.
Author: David K. Smucker, CPA, CLU, ChFC, MSM, is a retired technical director of the Advanced Consulting Group of a major life insurer. He holds a BA in history from Ohio State University, and an MSM from The American College. He earned his CPA certificate in 1973. Mr. Smucker is a frequent contributor to financial services and tax publications. In the Advanced Consulting Group, he advised producers, CPAs, and attorneys on tax and other aspects of executive compensation, business succession planning, and estate planning. He has developed and presented life insurance continuing education programs to CPAs and financial service producers on all of those topics. In retirement, he maintains a CPA practice limited to consulting on and administering split-dollar arrangements.