What is Corporate Owned Life Insurance?

Corporate Owned Life Insurance (COLI) is a common funding vehicle for non qualified deferred compensation plans. Coli is a life insurance policy owned by the corporation that insures the lives of one or more employees.

Will use of a COLI policy to fund a "Top Hat" plan cause the plan to be subject to ERISA provisions?

No, use of a COLI policy to fund a "Top Hat" plan will not subject the plan to extensive ERISA provisions.

Why would an employer want to purchase COLI?

The most common reason to purchase a COLI policy is to fund a Non Qualified Deferred Compensation plan.

Why would you want to establish a Non Qualified Deferred Compensation plan?
  • To supplement benefits provided by qualified plans.
  • To reduce benefits that are limited by Internal Revenue Code Provisions.
  • To attract, recruit, and retain qualified employees
  • To provide retirement benefits to key executives while avoiding the administrative costs of qualified plans.
  • To provide incentives for early retirement.
  • To defer premature termination's (Golden Handcuffs).
  • To enable the employer to provide benefits to a select few, rather than being forced to cover nearly all employees (as would be required with a qualified plan).
How are Non Qualified Deferred Compensation Plans categorized?

They are broken down into two categories, Deferral Plans and Supplemental Plans. Deferral plans provide deferred benefits in lieu of a portion of current compensation, a raise or a bonus. Supplemental plans provide an additional fringe benefit for key executives. The plan benefits are paid by the corporation and salary is not reduced and deferred.

When is it not advisable for a corporation to offer Non Qualified Deferred Compensation?

It is best not to use with Not-for-profit organizations and in partnerships and sole proprietorship. Additionally, they should not be used if the corporation is not fiscally sound.