A Deal Worth Your Consideration: A carefully structured NQDC Exit Strategy can provide a tax‐efficient alternative to installment distributions from a nonqualified deferred compensation plan. This strategy can eliminate the five significant risks of NQDC plans and put the executive in control of their assets.
Executives can exit heavily taxed retirement benefits for uniquely designed tax‐favored life insurance funded contracts on the life of the executive or the executive and his or her spouse. The Exit Strategy introduces important financial, tax, and accounting considerations potential participants and outside advisers must evaluate.
- To help executives maximize income at retirement and build wealth for future generations, some executives are taking advantage of a new strategy, the NQDC Exit Strategy. Executives can exit heavily taxed retirement benefits for uniquely designed tax‐favored life insurance funded contracts on the life of the executive or the executive and his or her spouse.
- If an executive decides to use the NQDC Exit Strategy, it does not require any company approval, as this is an individual decision and has no impact on the employer’s plan.
- The NQDC Exit Strategy can be used with all deferred compensation arrangements including SERPs, NQDC, stock deferral plans, and nonprofit organizations’ 457(b) and 457(f) plans.
- The NQDC Exit Strategy has the potential to create greater after‐tax income at retirement over what the executive could do on their own in an individual investment portfolio. Section 409A was added to the Internal Revenue Code, effective January 1, 2005, under Section 885 of the American Jobs Creation Act of 2004 and added complexity to an executive’s decision making options for retirement income. The effects of Section 409A are far‐reaching, because of the exceptionally broad definition of “deferral of compensation.” Section 409A was enacted, in part, in response to the practice of Enron executives accelerating the payments under their deferred compensation plans in order to access the money before the company went bankrupt, and also in part in response to a history of perceived tax‐timing abuse due to limited enforcement of the constructive receipt tax doctrine.