Author
David I. Walker

Published
March 17, 2019

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Although nonqualified deferred compensation plans lack explicit tax preferences afforded to qualified plans, it is well understood that nonqualified deferred compensation results in a joint tax advantage when employers earn a higher after-tax return on deferred sums than employees could achieve on their own. But the joint tax advantage depends critically on how plans are operated; chiefly how plan sponsors use or invest deferred compensation dollars. This is the first Article to systematically investigate nonqualified deferred compensation practices. It shows that joint tax minimization historically has taken a backseat to accounting priorities and participant diversification concerns. In recent years, the largest source of joint tax advantage likely stems from use of corporate owned life insurance (COLI) to informally fund nonqualified deferred compensation liabilities. To be sure, the reduction in corporate tax rates enacted in the Tax Cuts and Jobs Act increases the joint tax benefit of nonqualified deferred compensation. Nonetheless, this Article recommends a measured response focusing first on COLI reform and an extension of the application of the Affordable Care Act’s Net Investment Income Tax to nonqualified deferred compensation earnings, before considering fundamental reform of the taxation of nonqualified deferred compensation. This Article also reveals that nonqualified deferred compensation results in an undisclosed advantage to corporate executives, as it provides what are effectively above-market returns on retirement savings, and that, at least in recent years, shareholders, not taxpayers, have provided the bulk of the subsidy for nonqualified deferred compensation.