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
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