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Funding a Plan

When a sponsor establishes a nonqualified benefit program, including a nonqualified deferral plan, the company is obliged to represent the commitment to distribute future benefits on their current balance sheet in the form of a liability. For an NQDP, the liability is equal to the aggregate account balances accrued by the participants.

During the accumulation period when participants are deferring receipt of current income, the company actually increases their after-tax cash flow by retaining the compensation they otherwise would have paid to the participants. As time passes, the value of the participants' accounts becomes significant. Many companies elect to invest the retained compensation into a funding mechanism to satisfy the benefit obligation when it becomes due.

There are two basic choices for a company: Pay-As-You-Go or set aside funding to satisfy the future benefit obligation. For companies that do set aside funding, two of the most popular options are Mutual Funds and Corporate Owned Life Insurance (COLI).

 

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