What is a 'non-qualified deferred compensation plan' (NQDC) and how is life insurance sometimes used in connection with it?

NON-QUALIFIED DEFERRED COMPENSATION (NQDC) is a promise by an employer to pay compensation to a key employee at a future date (retirement, death, disability, or separation). CONTRAST WITH QUALIFIED PLANS: Qualified plans (401k, pension) follow ERISA, offer tax deductions to employer, are pre-funded, and have contribution limits; NQDC plans: do NOT follow ERISA, no contribution limits, employer deduction occurs only when employee receives the income (not when the promise is made), and are NOT pre-funded in the traditional sense — the employee has only an unsecured promise. RABBI TRUST: A common NQDC funding vehicle — assets are set aside in trust but remain accessible to the employer's creditors in bankruptcy; the arrangement provides informally secured funding without triggering current taxation to the employee. LIFE INSURANCE IN NQDC: Many companies use COLI (corporate-owned life insurance) to informally fund NQDC obligations; the policy's cash value grows tax-deferred, providing funds to pay the deferred compensation when due; the death benefit also funds the obligation if the executive dies before retirement; this is an informal arrangement — the policy is a corporate asset, not formally allocated to the employee's benefit; RISKS TO EMPLOYEE: The NQDC promise is an unsecured obligation — if the company becomes insolvent, the executive is a general creditor; the life insurance inside a rabbi trust is also available to creditors; this is why NQDC is primarily used for highly compensated executives who can tolerate this risk.