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All you need to know about Long Term Care Products: how traditional LTC insurance, life insurance with an LTC rider, asset-based hybrids like Nationwide CareMatters and Lincoln MoneyGuard, and annuity-based LTC each work — plus how C corporations, S corporations and individuals deduct LTC premiums, and how to set it up.

If you have already decided that giving away real equity is off the table, you are asking a different question than most articles answer. You do not need another explanation of what phantom stock is. You need to know how to build one that survives an IRS review, does not wreck your cash flow, and actually keeps your right-hand person from taking a call from your competitor.

This guide is that build. Below is the design sequence we walk business owners through when we create a phantom stock plan for business owners inside The Perfect Plan® framework — from picking the plan type, to setting the valuation formula, to funding the future liability so the payout does not come out of operating cash.

If you are still deciding between structures, start with our free Phantom Stock vs. Stock Options vs. Real Equity Checklist (PDF) and come back here when you are ready to build.

Step 1: Pick the Plan Type — Full Value or Appreciation Only

This is the single decision that drives everything downstream, and most owners get it wrong by defaulting to whichever one their attorney drafted last.

Full-value phantom shares pay out the entire value of each unit at the triggering event. Grant an executive 1,000 units when the company is worth $500 per share, and if the company is worth $800 per share at payout, they receive $800,000. The full value transfers, including the value you already built before they arrived.

Appreciation-only units — functionally stock appreciation rights — pay only the growth above the value on the grant date. Same 1,000 units, same $500-to-$800 move, and the payout is $300,000. The executive is rewarded for the value they helped create, not the two decades of work you did before hiring them.

For most closely held companies, appreciation-only is the correct answer. It costs less, it is easier to defend to your other executives, and it aligns the incentive precisely where you want it: forward growth. Full-value grants make sense when you are recruiting against a public company that is dangling real RSUs, or when the recipient is a successor you genuinely intend to enrich.

A third option worth knowing: hybrid plans that pay appreciation on an ongoing basis and full value at a change of control. These reward year-over-year performance while reserving the life-changing number for the exit.

Step 2: Define the Valuation Formula Before Anyone Is Emotional

Here is where phantom stock plans die. The plan document says the payout is based on “fair market value of the company,” and five years later, the executive’s attorney and your CPA are $4 million apart on what that phrase means.

Your plan document must specify a repeatable, mechanical valuation method. The common approaches:

Formula valuation. A multiple of EBITDA, revenue, or book value, defined in the document. Example: 5.5x trailing twelve-month EBITDA, less funded debt, plus cash. Simple, cheap, predictable, and it lets the executive calculate their own number, which is a retention feature in itself.

Independent appraisal. A credentialed third-party valuation performed annually. More expensive, more defensible, and generally required if your plan is large enough to attract IRS attention.

Board determination with a defined methodology. Flexible, but the weakest position if it is ever challenged. If you use it, document the methodology, not just the conclusion.

Whichever you choose, address the edge cases in writing: What happens if you take on debt for an acquisition? If you sell a division? If a bad year drops the value below the grant price? A plan that does not answer these questions is a plan that will be renegotiated at the worst possible moment.

For help establishing a defensible number, see our business valuation resources.

Step 3: Build the Vesting Schedule — Your Actual Golden Handcuffs

Vesting is the retention mechanism. Everything else is compensation design; this is the part that keeps people.

Time-based (cliff or graded). Five-year cliff vesting is the most aggressive retention tool available — nothing vests until year five, and walking away in year four forfeits everything. Graded vesting, say 20% per year, is gentler and more common, but it creates a smaller reason to stay in any given year.

Performance-based. Units vest when the company hits defined milestones: a revenue threshold, an EBITDA target, a successful acquisition. This ties the reward to outcomes rather than tenure.

Rolling or evergreen grants. New units are granted each year with their own vesting clock, so the executive is always leaving something on the table. This is the design that produces the strongest long-term hold, and it is what we most often recommend for a key executive you intend to keep through your exit.

A note owners consistently underestimate: your vesting schedule needs to match your succession timeline. If you plan to sell in six years, a ten-year cliff is meaningless to a 58-year-old CFO and insulting to a 42-year-old VP of Sales. Work backward from your exit date. Our guide to how executive benefit needs evolve from startup to succession maps this out by company stage.

Step 4: Choose Your Triggering Events — Carefully, Because 409A Is Watching

A phantom stock plan is nonqualified deferred compensation, which means Internal Revenue Code Section 409A governs when payment can occur. This is not a formality. A 409A failure taxes the executive immediately on all vested amounts, adds a 20% additional federal tax, and adds premium interest — and it is the employee who gets hit, which makes it a retention catastrophe rather than a retention plan.

Under 409A, payment may generally be triggered only by a permitted event:

• Separation from service


• A specified fixed date or fixed schedule set at the time of deferral


• Change in control of the company


• Death


• Disability


• Unforeseeable emergency

Notice what is not on that list: “whenever the board decides,” “when the executive asks,” or “when cash flow allows.” Discretion is the enemy. Build the payment triggers into the document at the outset and follow them.

There is one meaningful exception worth designing around — the short-term deferral rule. If the payment is made within two and a half months after the end of the year in which it vests, it may fall outside 409A entirely. That works for annual appreciation payouts. It does not work for a plan designed to pay at a sale five years from now.

Also decide upfront how a payout is made: lump sum or installments. Installments over three to five years soften the cash flow hit and create a post-employment non-compete incentive, but the schedule must be locked in the original document.

For the full compliance picture, see our complete guide to IRC 409A compliance in 2026. If you suspect an existing plan already has a problem, we handle 409A corrections.

Step 5: Understand the Tax Treatment on Both Sides of the Table

For your executive: Phantom stock payouts are ordinary W-2 income, subject to federal, state, and payroll withholding. This is the honest trade-off you should disclose in the recruiting conversation — real equity held long enough can produce capital gains treatment, and phantom stock cannot. What phantom stock offers instead is no purchase price, no capital at risk, no personal guarantee, and no illiquid minority stake in a private company they cannot sell.

For you, the company: You receive a compensation deduction in the same year the executive recognizes the income, and in the same amount. This is a genuine structural advantage over an ESOP or a direct equity grant, and it is worth modeling. A $1 million payout at a 21% corporate rate is a $210,000 deduction landing in the same year as the expense.

Payroll tax timing deserves its own conversation with your CPA. Depending on how the plan is structured, FICA may be due at vesting rather than at payment under the special timing rule — which can produce a payroll tax bill years before any cash changes hands. Get this modeled before you sign, not after.

One item almost no one flags in advance: under ASC 718, phantom stock is a liability-classified award, remeasured at fair value every reporting period. As your company’s value rises, so does the compensation expense running through your P&L — and it moves with your valuation, not with a fixed schedule. If you have a bank covenant tied to EBITDA or net income, model this before you sign. We have seen well-designed retention plans create genuinely awkward lender conversations.

Step 6: Solve the Funding Problem Before It Becomes a Cash Flow Problem

This is the question every owner eventually asks: if this works, I will owe my executives a large pile of cash at exactly the moment I most want cash. Where does it come from?

An unfunded phantom stock plan is a promise backed by future operating cash. That is fine at a $50,000 liability and genuinely dangerous at $3 million — particularly if the trigger is a sale, because a buyer will treat that obligation as a reduction of your proceeds, dollar for dollar.

The most common institutional answer is Corporate Owned Life Insurance (COLI). The company purchases and owns policies on the covered executives, with cash value accumulating on a tax-deferred basis. When the payout comes due, the company has an asset sitting against the liability instead of a hole in the operating account. Because the company owns the policy, the death benefit can also recover the plan’s total cost over time — which is the difference between a benefit that is an expense and a benefit that is an investment. Designed well, the plan approaches full cost recovery.

Two compliance items are non-negotiable if you go this route: IRC 101(j) notice and consent requirements must be satisfied before the policy is issued, and the funding vehicle must remain a general corporate asset — informally funded, not formally set aside — or you create constructive receipt and lose the tax deferral you were trying to protect.

Learn more about how COLI works as a cost recovery vehicle.

Step 7: Get the Documentation and Filings Right

The plan document is the whole plan. Verbal understandings and term sheets are how disputes start. At minimum, your document needs:

• Number of units granted and the grant date value


• Full-value or appreciation-only designation


• The valuation methodology, stated with enough specificity to be replicated


• Vesting schedule and forfeiture conditions


• Permitted payment triggers and the payment form


• Treatment on death, disability, termination for cause, and voluntary resignation


• Anti-dilution and adjustment provisions for recapitalizations or distributions


• Amendment and termination authority — and its limits

Do not skip the ERISA analysis. Depending on structure, a phantom stock plan may be treated as a top-hat plan that primarily benefits a select group of management or highly compensated employees, which carries a Department of Labor filing obligation within 120 days of adoption. It is a short filing. Missing it is an unforced error with real consequences. See our guide to the top hat plan filing deadline.

The Five Mistakes We See Most Often

1. Vague valuation language. “Fair market value as determined by the board” is not a formula. It is a future lawsuit.


2. Granting too widely. Phantom stock is a top-hat tool for a select group. Extending it broadly can jeopardize the ERISA exemption and dilute the psychological value for the people who actually matter.


3. No funding plan. The liability grows precisely as fast as your success does. That is the design working, and it needs an asset behind it.


4. Ignoring the P&L impact. Liability-classified awards create earnings volatility. Your lender and your CFO should both see the model before adoption.


5. Treating it as a document instead of a conversation. An executive who does not understand the plan is not retained by it. Research on executive benefits consistently shows a wide comprehension gap — a benefit your key people cannot explain is a benefit that is not doing its job. Build an annual statement that shows each participant their current unit value.

Is a Phantom Stock Plan Right for Your Company?

The profile that fits: a privately held company with meaningful enterprise value, one to five genuinely key executives whose departure would materially damage the business, an owner who wants to retain full voting control, and a succession or sale horizon within roughly three to ten years.

The profile that does not fit: companies looking to reward broad-based employee populations, businesses with no reliable way to establish enterprise value, or owners who are actually ready to transfer real ownership — in which case you should be evaluating an ESOP or a direct equity sale.

Phantom stock also does not have to stand alone. It sits well alongside a SERP for retirement security, a Section 162 bonus plan for portable death benefit, or a REBA when you want golden handcuffs with a personally owned asset attached. Most of the plans we design are combinations, because most retention problems have more than one moving part. Our executive benefits guide for business owners covers how the pieces fit together.

Frequently Asked Questions

How much does it cost to set up a phantom stock plan?

Design and documentation costs vary with complexity, but the meaningful cost is the future payout itself — which is why the funding conversation matters more than the setup fee. A well-designed plan using COLI as a cost recovery vehicle can approach full cost recovery over the life of the arrangement.

Does phantom stock dilute my ownership?

No. No shares are issued, your cap table is unchanged, and participants receive no voting rights, no board seats, no inspection rights, and no claim on ownership. You retain complete control.

How is phantom stock taxed?

Payouts are ordinary income to the executive, subject to normal withholding. The company takes a compensation deduction in the same year and the same amount. There is no capital gains treatment, because no capital asset is transferred. Payroll tax timing depends on plan structure and should be modeled in advance.

What happens to phantom stock if I sell the company?

That depends entirely on how you drafted it. Most plans define a change of control as a triggering event, accelerating vesting and paying participants out of the transaction proceeds. Buyers will treat this as a reduction in what you receive, so the number belongs in your exit model years before the letter of intent.

Can an S corporation offer phantom stock?

Yes — and it is one of the strongest arguments for the structure. Because no second class of stock is created and no additional shareholder is added, phantom stock lets an S corp reward key people without threatening its S election or its shareholder limit.

What is the difference between phantom stock and stock appreciation rights?

The terms overlap heavily in practice. Phantom stock most often refers to full-value units, while SARs pay only appreciation above the grant date value. Many advisors, including us, use “phantom stock” as the umbrella term and specify full-value or appreciation-only in the document.

Do I have to give participants access to my financial statements?

No. This is one of the quieter advantages. Because participants are not shareholders, they have no statutory inspection rights. You control exactly what you disclose — though we recommend an annual unit statement, because a benefit no one can see is a benefit that is not retaining anyone.

Build It Right the First Time

A phantom stock plan is not a form you download. It is a valuation methodology, a vesting strategy, a 409A compliance structure, a funding vehicle, and a communication plan — and getting any one of them wrong turns a retention tool into a liability.

At Schiff Executive Benefits, we have spent nearly 65 combined years designing these plans for privately held companies and banks. We start with your goal, then reverse engineer the structure, then make sure the “feel” of the plan matches your culture and your intent. And we work alongside your CPA and attorney rather than replacing them.

Take the next step:

Schedule your Perfect Plan® initial meeting — a straightforward conversation about your key people, your timeline, and what a plan would actually cost.

Call (610) 292-9330 or email info@schiffbenefits.com

Free download: Phantom Stock vs. Stock Options vs. Real Equity — Comparison Checklist (PDF). Eighteen design questions answered side by side, plus a decision checklist you can work through with your CPA and attorney.

You built the company. Let’s make sure the people who help you run it have a very good reason to stay — without giving away a single share.

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Matt Schiff is President of Schiff Executive Benefits and host of The Perfect Plan® Podcast. He specializes in helping business owners navigate executive retention, nonqualified deferred compensation, and benefit security.

This article is for informational purposes only and does not constitute tax or legal advice. Plan design should be reviewed with your CPA and attorney. Securities offered through The Leaders Group, Inc. Member FINRA/SIPC.

Every business owner I sit down with eventually asks some version of the same question: "How do I make my best people think like owners without actually making them owners?"

That question has more than one answer. And most of the confusion I see in the market comes from owners who have heard four different terms — stock options, restricted stock, SARs, phantom stock — used almost interchangeably by four different advisors. They are not the same thing. They do not carry the same risks. And picking the wrong one is expensive to unwind.

So let's put them side by side.

Start with the real question

Before comparing instruments, get clear on what you are actually trying to solve. In my experience it is almost always one of three things:

1. Retention. You have one to three people whose departure would genuinely hurt, and you want a reason for them to stay.


2. Alignment. You want their financial outcome tied to enterprise value, not to this year's revenue number.


3. Succession. You are building toward an exit and you need a management team that survives the transaction.

The instrument you choose should follow from the answer. If you're not sure which of these is driving you, my pillar piece on creating an ownership feel without giving away the farm walks through that diagnostic in more depth.

The four main options

Real equity (restricted stock or direct grants)

The executive becomes an actual shareholder. They get a certificate, a seat at the cap table, and, depending on your governance documents, voting rights. Could be done through Restricted Stock Units.  For more information on RSU's: Click Here

Upside: Nothing signals commitment like the real thing. It's also the cleanest story to tell a recruit.

Downside: Dilution is permanent. You inherit minority shareholder obligations, information rights, and fiduciary duties. Every strategic decision now has an audience. And if that person leaves — or divorces, or dies — you are living inside your buy-sell agreement, hoping you drafted it well.

Best fit: True partnership tracks in professional firms, or a co-founder who was always going to be a co-founder.

Stock options

The executive gets the right to buy shares later at today's price.

Upside: No cash outlay for the company at grant. Genuine upside participation.

Downside: In a closely held company, options are often a promise the executive can't cash. There's no market for the shares. Exercising means writing a check for stock they cannot sell. Meanwhile you still face eventual dilution, and you carry the valuation and administrative burden the whole time.

Best fit: Companies with a realistic liquidity path — a planned sale, a strategic buyer, or a market for the shares.

Stock appreciation rights (SARs)

A cash (or stock) payment equal to the growth in share value from grant to exercise. No purchase required.

Upside: Pure upside participation with no check to write and no cap table change.

Downside: SARs reward appreciation only. If your company is a stable, profitable, slow-growth enterprise, a SAR may pay very little even though the executive is doing exactly what you hired them to do.

Best fit: Growth-stage companies where enterprise value is the scoreboard.

Phantom stock

A contractual promise to pay cash in the future, tied to the value of a notional number of shares. No stock is issued. No dilution. No voting rights.

Upside: You keep 100% of control while the executive's economics move with yours. The plan is private — you are not publishing your cap table to your management team. Design is flexible: full value or appreciation only, vesting on time or performance, payment at a liquidity event or on a schedule.

Downside: It is a company liability, not a share of the company. That liability needs funding (more on that below), and the payout is ordinary income to the employee rather than capital gain.

Best fit: Closely held businesses where the owner is not ready — and may never be ready — to share the cap table. This is the category most of my clients land in, which is why I wrote the full phantom stock overview as a standing resource.

The comparison at a glance

	Real equity	Stock options	SARs	Phantom stock
Dilutes ownership	Yes	Yes, at exercise	No	No
Voting rights	Usually	At exercise	No	No
Employee cash required	Sometimes	Yes	No	No
Company cash required	No	No	At payout	At payout
Rewards total value	Yes	Appreciation only	Appreciation only	Your choice
Employee tax treatment	Often capital gain	Varies	Ordinary income	Ordinary income
Governed by IRC 409A	Generally no	Often exempt if structured properly	Often, depending on design	Yes
Reversible if it isn't working	Difficult	Difficult	Moderate	Easiest

That last row deserves more attention than it usually gets. Equity is close to permanent. A phantom plan is a contract you designed, and the next plan can be designed differently.

Two things owners underestimate

The funding problem. A phantom stock plan creates a future obligation. If the company doubles, so does what you owe. Owners who ignore this end up successful and cash-poor at the same time. Properly structured corporate owned life insurance can pre-fund the liability and, in many designs, deliver full cost recovery over the life of the plan.

IRC 409A. Phantom stock is deferred compensation, and the IRS treats it accordingly. Vague valuation methods, flexible payment timing, or informal amendments can trigger immediate taxation to the employee plus a 20% penalty — a spectacular way to turn a retention tool into a resentment tool. Our 2026 guide to 409A compliance covers what the rules actually require.

How to choose

Ask three questions, in order:

1. Am I willing to have this person as a legal co-owner ten years from now? If no, you are choosing among SARs and phantom stock, and the conversation gets much simpler.


2. Do I want to reward total company value, or only the growth from here? Full-value phantom units reward the former. SARs and appreciation-only phantom units reward the latter.


3. How will I pay for it? If you don't have an answer, you don't have a plan yet — you have an intention.

Most closely held business owners who work through those three questions honestly arrive in the same place. They want the alignment without the entanglement. That is precisely what phantom stock was built to do, and it's the core of what we call The Perfect Plan®.

Ready to compare these against your actual numbers?

phantom stock vs stock options

A side-by-side chart is useful. A design built around your valuation, your key people, and your exit timeline is better. If you'd like to see how each of these would look inside your business, schedule a conversation — bring your coffee and your questions.

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Matt Schiff is the President of Schiff Executive Benefits and the host of The Perfect Plan® Podcast. He specializes in helping business owners navigate the complex world of executive retention and benefit security.

Related Resources

• Phantom Stock: Creating an Ownership Feel Without Giving Away the Farm


• Phantom Stock: Technical Deep Dive into 409A and COLI Funding


• Supplemental Executive Retirement Plans (SERP)


• ESOP – Employee Stock Ownership Plan

The only certainty in business is change, yet for the American executive, the most daunting change is often the shifting sand of tax law. In a world where talent is the ultimate currency, how you reward your top performers is just as important as the performance itself. However, a reward that triggers a massive tax penalty isn't a reward: it’s a liability.

At Schiff Executive Benefits, we believe that the foundation of any sophisticated executive benefit program must be built on the rock-solid ground of compliance. Navigating IRC 409A Deferred Compensation Plans in 2026 requires more than just a passing knowledge of the tax code; it requires an "insider’s" perspective.

I’m Matt Schiff, and for over two decades, I’ve dedicated my career to helping businesses navigate these complex waters. My perspective is unique: I was in the room where it happened. In 2003 and 2005, I served as a ranking member of the AALU’s NQDC Committee alongside Michael Goldstein. Together, we worked with the IRS and Treasury to help draft the very regulations that govern 409A nonqualified deferred compensation plans today.

If you’ve ever wondered what keeps a CEO up at night, it’s often the "What Ifs." What if our plan doesn't comply with Section 101(j)? What if the new OBB Act rules trigger an excise tax we didn't budget for? Let’s dive into the state of executive compliance in 2026 and ensure your program is built for longevity.

IRC 409A Deferred Compensation Plans: The Regulatory Foundation

Internal Revenue Code Section 409A was born out of the chaos of the early 2000s, designed to bring order to the "Wild West" of nonqualified deferred compensation (NQDC). It establishes strict rules for when an executive can elect to defer pay, when that pay can be distributed, and what happens if those rules are broken.

The stakes could not be higher. A failure to comply with 409A results in immediate taxation of all deferred amounts, a 20% federal penalty tax, and premium interest charges. For a high-earning executive, this can be financially devastating.

In 2026, 409A remains the primary framework for employer-funded NQDC plans. Whether you are implementing a 401(k) Mirror Plan: especially relevant now that the 2026 401(k) contribution limit is set at $24,500: or a discretionary supplemental executive retirement plan (SERP), 409A is the gatekeeper. It ensures that the "intent" of the plan matches the "execution," protecting both the company's deduction and the employee’s tax deferral.

IRC 101(j) Compliance: Securing Your Funding

Many companies choose to fund their deferred compensation liabilities through Corporate Owned Life Insurance (COLI). COLI is an incredibly efficient tool, providing tax-deferred growth and a tax-free death benefit that can eventually recover the company’s costs. However, to maintain that tax-free status, you must satisfy IRC 101(j).

I helped draft the 101(j) regulations to ensure there was a clear pathway for employers to use life insurance responsibly. Compliance is simple in theory but often missed in practice. It requires:

1. Notice and Consent: The employee must be notified in writing that the employer intends to insure their life and the maximum face amount for which they could be insured.


2. Written Consent: The employee must provide written consent to being insured and acknowledge that the coverage may continue after they leave the company.


3. Timing: This must all happen before the policy is issued.

Failure to comply with 101(j) turns a tax-free death benefit into taxable income. When we look at COLI solutions, our first step is always a compliance audit to ensure every policy in the portfolio is "bulletproof."

ERISA Compliance for NQDC: Staying in the "Top-Hat" Lane

While NQDC plans are "nonqualified," they are still subject to certain parts of the Employee Retirement Income Security Act (ERISA). To avoid the onerous funding and vesting requirements of a traditional pension plan, NQDC plans must qualify as "Top-Hat" plans.

A Top-Hat plan is one maintained primarily for the purpose of providing deferred compensation for a "select group of management or highly compensated employees." To secure this status, the plan sponsor must:

• Limit participation to those who have the bargaining power to influence the plan's design.


• File a "Top-Hat Letter" with the Department of Labor (DOL) within 120 days of the plan’s adoption.

Staying in the Top-Hat lane is essential for maintaining the flexibility that makes NQDC so attractive to business owners. Without this exemption, your executive plan would be forced to follow the same rigid rules as your broad-based 401(k).

How the OBB Impacted Section 162 Limits and Executive Pay

The landscape shifted significantly with the passage of the One Big Beautiful Bill Act (OBB). This legislation brought sweeping changes to how both public and private entities view executive compensation, specifically through the lens of Section 162(m) and Section 4960.

Public Entities: The Controlled Group Expansion

For public corporations, Section 162(m) historically capped the tax deduction for compensation paid to "covered employees" at $1 million. However, the OBB Act expanded this significantly for 2026.

Now, the $1 million deduction limit applies to the entire "controlled group." This means that if you have a parent company and several subsidiaries, you can no longer "spread" executive pay across different entities to maximize deductions. The IRS now views the organization as a single employer for deduction purposes. This change has made IRC 409A Deferred Compensation Plans even more critical, as companies look for ways to provide competitive pay while managing the loss of tax deductions on cash compensation.

Not-for-Profit Organizations: Section 4960 and the Universal Excise Tax

The impact on Not-for-Profit (NFP) organizations is perhaps even more profound. Under the expanded Section 4960 rules, a 21% excise tax is now levied on compensation exceeding $1 million paid to any employee.

Previously, this excise tax only applied to the "top five" highest-paid employees. In 2026, it is universal. Furthermore, the "once a covered employee, always a covered employee" rule remains in effect. If an employee was a "covered employee" at any time after 2016, any compensation they receive over $1 million: including deferred compensation distributions: triggers the 21% excise tax for the NFP organization.

Understanding what constitutes "recognized compensation" is the key to navigating these OBB rules. For public entities, it's about managing the corporate deduction; for NFPs, it's about avoiding a massive excise tax bill that could otherwise be used for the organization's mission.

Reverse-Engineering Compliance: The Perfect Plan^® Approach

At Schiff Executive Benefits, we don't just sell products; we reverse-engineer solutions. We start with the goal: What are you trying to achieve? Are you trying to solve the "What If" of top talent leaving for a competitor? Or are you concerned about a senior executive's retirement cost efficiency?

Our process for creating The Perfect Plan^® involves working alongside your existing team of advisors: your accountant, your attorney, and your TPA. We ensure that your benefit structure matches your company culture and intent, but most importantly, we ensure it complies with the labyrinth of IRC 409A, 101(j), and the new OBB Act mandates.

Compliance isn't a "one and done" event; it’s an ongoing commitment. By leveraging our deep technical expertise: the kind of expertise that comes from actually helping write the laws: we provide a level of security that generic brokers simply cannot match. We help you build a legacy of "Restoring Alignment and Retention."

If you are ready to see how your current executive benefits stack up against the 2026 compliance landscape, or if you are looking to design a program from the ground up, we invite you to take the next step.

Sit back, grab your coffee, and let’s discuss your future.

• Determine Your Business Value: Use our RISR Valuation tool to see what's at stake.


• Schedule a Strategy Session: Book a Teams Meeting with Matt Schiff to review your IRC 409A Deferred Compensation Plans.


• Deep Dive: For more insights into the technical side of executive benefits, explore our Executive Benefits Guide for Business Owners.

Let’s ensure your plan is more than just a promise: let's make it The Perfect Plan^®.

The greatest asset of any successful business doesn't appear on the balance sheet; it walks out the door every evening at 5:00 PM. As a business owner, you’ve likely felt that late-night anxiety: What happens if your top executive : the one who keeps the wheels turning and the culture thriving : is recruited by a competitor? Or worse, what happens if they simply feel they’ve hit a ceiling and decide to move on because their current retirement plan is "capped out"?

In the world of executive retention, standard benefits are rarely enough. If you want to keep your best people happy and aligned with your long-term vision, you need something more sophisticated. You need NQDC Executive Benefits.

At Schiff Executive Benefits, we specialize in reverse-engineering these solutions. We don't just sell products; we design structures that protect your business while providing life-changing security for your key talent.

What Are NQDC Executive Benefits?

Nonqualified Deferred Compensation (NQDC) plans are specialized arrangements that allow employers to provide benefits to a select group of management or highly compensated employees. Unlike traditional 401(k) plans, which are "qualified" under ERISA rules and subject to strict contribution limits, NQDC plans are "nonqualified." This means they are exempt from many of those restrictive caps, allowing for much larger deferrals and more flexible design.

Essentially, NQDC executive benefits are a promise: the company agrees to pay the executive a certain amount of money at a future date (usually retirement, disability, or death) in exchange for their service today. Because these plans are discretionary, you can choose exactly who participates. You don't have to offer them to everyone : just the "Top Hat" group that truly drives your bottom line.

How NQDC Executive Benefits Work for Business Owners

For the business owner, an NQDC plan is a powerful tool for restoring alignment and retention. It allows you to create a "golden handcuff" effect that keeps executives focused on the company’s long-term growth.

The mechanics are straightforward:

1. The company and the executive enter into a legal agreement.


2. The executive (or the employer) contributes a portion of compensation into a deferred account.


3. These funds grow tax-deferred until they are distributed.


4. The company typically uses a funding vehicle, like Corporate-Owned Life Insurance (COLI), to ensure the cash is there when it’s time to pay out.

This structure allows you to answer the critical "What If" questions that keep owners awake. What if your top talent leaves? What if a senior executive retires and the replacement cost is prohibitive? By having an NQDC plan in place, you’ve already pre-funded those liabilities while creating a massive incentive for the executive to stay.

The Difference Between Qualified and Nonqualified Plans

If you’ve ever felt frustrated by 401(k) testing or the $24,500 (plus catch-up) contribution limits for your high earners, you already understand the limitation of qualified plans.

Qualified plans (401(k), Profit Sharing, etc.) must be non-discriminatory. You have to offer them to everyone, and the government limits how much your top earners can put away. For an executive making $300,000 or $500,000, a standard 401(k) barely moves the needle for their retirement lifestyle.

NQDC executive benefits, however, are discriminatory by design. You can:

• Select specific individuals for the plan.


• Allow for much higher contribution amounts (often up to 100% of bonus or a large % of salary).


• Set custom vesting schedules that align with your business goals.

Why NQDC Executive Benefits Are Essential for Retaining Key Talent

In a competitive market, salary is just the entry fee. True retention comes from building a bridge between the executive's personal success and the company's long-term health.

Custom Vesting Schedules and Golden Handcuffs

One of the most powerful features of NQDC executive benefits is the ability to use "golden handcuffs." Through employer-funded NQDC plans, you can contribute additional compensation that only vests over a long period : say, 5 or 10 years : or upon reaching a specific age.

If the executive leaves early, they leave the money on the table. This provides a tangible reason for them to ignore the siren song of a competitor. It’s not about holding them hostage; it’s about rewarding their loyalty with a benefit they simply cannot get anywhere else.

Types of NQDC Executive Benefit Plans

Not all plans are created equal. Depending on your goals : whether you want to provide "ownership feel" or simply a retirement bridge : we select from several different structures.

Employer-Funded NQDC Plans

Also known as discretionary plans, these are funded entirely by the company. This is a powerful "bonus" tool. Instead of giving a cash bonus that is taxed immediately at the highest brackets, you put that money into an NQDC account. It grows tax-deferred, and the executive only pays taxes when they receive the money in retirement.

Employee-Funded NQDC Plans (401(k) Mirror)

An Employee-Funded 401(k) Mirror Plan allows your executives to defer their own salary or bonuses beyond the 401(k) limits. This is purely a tax-planning tool for the executive, but it provides immense value by allowing them to save for retirement in a way that the government typically restricts.

SERP : Supplemental Executive Retirement Plans

A SERP is a "defined benefit" version of an NQDC plan. It promises a specific monthly or annual payout at retirement. It’s essentially a private pension for your most critical leaders.

Phantom Stock Plans

Want to give your key people the "ownership feel" without actually diluting your equity or giving them voting rights? Phantom Stock tracks the value of your company. If the company value goes up, the executive’s account balance goes up. It aligns their daily decisions with the total value of the business.

Split Dollar Life Insurance

Split Dollar programs are a sophisticated way to provide life insurance and retirement income using a shared-cost or shared-benefit arrangement. It’s one of the most cost-effective ways for a corporation to provide 100% protection to an employee's family while recovering every dollar the company spent on the program.

REBA : Restricted Executive Benefit Arrangements

A REBA uses a restricted executive bonus structure to build a tax-free retirement bucket for the executive, while still maintaining corporate control over the asset until certain conditions are met.

How to Fund NQDC Executive Benefits

Designing the plan is only half the battle. The other half is ensuring the plan is funded so the company can meet its future obligations without creating a cash flow crisis.

Corporate-Owned Life Insurance (COLI) as a Funding Vehicle

COLI is the "gold standard" for funding NQDC executive benefits. The company owns a life insurance policy on the executive. The cash value grows tax-deferred, and the company can borrow against or withdraw from that cash value to pay the deferred compensation benefits.

Crucially, when the executive eventually passes away, the death benefit flows back to the company tax-free, allowing for "full cost recovery" of every dollar paid out in benefits plus the cost of the premiums.

The Perfect Plan^® Funding Strategy

We utilize The Perfect Plan^® methodology to ensure these programs are structured for maximum efficiency. Our goal is to achieve "Retirement Made Simple": a fixed dollar amount, a fixed period, and a fixed cash flow for the executive, with total cost recovery for the employer.

409A Compliance and NQDC Executive Benefits

If you are going to play in the world of NQDC, you must understand the rules. IRC Section 409A is the federal law that governs how these plans must be structured, documented, and operated. The penalties for a 409A violation are draconian: the executive is taxed immediately on all deferred amounts, plus a 20% penalty tax and premium interest.

This is where technical expertise matters. Matt Schiff, the President of Schiff Executive Benefits, has a unique authority here. Between 2003 and 2005, Matt served as a ranking member of the AALU's NQDC Committee. Alongside industry legend Michael Goldstein, Matt was "in the room where it happened," helping to draft the very regulatory frameworks that became IRC 409A and IRC 101(j).

We don't just read the law; we understand the intent behind it. You can hear more about this "insider" perspective in The Perfect Plan^® Podcast interview with Dan Hogans, the former IRS/Treasury official who was the principal author of the 409A regulations.

Understanding what is a 409A plan and the cost of getting it wrong is vital for any business owner considering these benefits.

Tax Advantages of NQDC Executive Benefits

The beauty of NQDC executive benefits lies in the tax arbitrage:

1. For the Executive: They defer income during their highest-earning years and take distributions in retirement, potentially in a lower tax bracket, all while the money grows tax-deferred.


2. For the Employer: While the company doesn't get a tax deduction until the money is actually paid to the executive, the use of COLI allows the company to grow the funding assets tax-efficiently and eventually recover the costs through tax-free death benefits.

Is an NQDC Executive Benefit Plan Right for Your Business?

Every business is different, but the core questions remain the same. Are you prepared for the "What Ifs"?

• What if your business ends up with a widow as a partner?


• What if you need a buy-out strategy for a departing key executive?


• What if your top talent leaves for a 15% raise because you didn't have "golden handcuffs" in place?

If you are an established business owner with a team of high-performing executives, NQDC executive benefits are not a luxury: they are a strategic necessity. They allow you to reward the people who built your dream while protecting the future of the company you’ve worked so hard to create.

At Schiff Executive Benefits, we help you realize your dream value by building it your way. We work alongside your existing team of advisors: your accountant, attorney, and TPA: to ensure the plan is integrated and compliant.

Are you ready to see what your business is worth and how you can better protect its future?

Sit back, grab your coffee, and let’s start the conversation. You can begin by getting a clear picture of your business valuation and identifying the gaps in your executive retention strategy.

Get Your Business Valuation & Executive Assessment Here

Ready to discuss how NQDC Executive Benefits can transform your retention strategy? Schedule a Teams Meeting with Matt Schiff Here.

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In business, as in life, the rules we don’t know are often the ones that cost us the most. We operate on a foundation of trust and predictability, but when the IRS introduced Internal Revenue Code Section 409A, the landscape of executive compensation changed forever. It turned a handshake agreement into a complex web of timing, triggers, and technicalities.

If you are a business owner or a key executive, you’ve likely heard the term "409A" whispered in boardrooms or mentioned by your CPA with a tone of caution. But what exactly is it? Why does it seem to haunt every deferred compensation discussion? And more importantly, what happens if you get it wrong?

At Schiff Executive Benefits, we don’t just read the regulations: we were there when they were written. Let’s pull back the curtain on Section 409A and see how it impacts your ability to attract, retain, and reward your top talent.

What is IRC Section 409A?

At its simplest, IRC Section 409A is the set of federal tax rules governing Nonqualified Deferred Compensation (NQDC).

Before 2004, the rules around when an executive could defer pay: and when they had to take it: were relatively loose. Following the high-profile corporate scandals of the early 2000s, Congress enacted Section 409A as part of the American Jobs Creation Act of 2004. Its mission was clear: prevent executives from manipulating the timing of their income to avoid taxes or "pull out" money just before a company hit hard times.

Essentially, 409A dictates three main things:

1. When you must decide to defer pay: Generally, the decision must be made in the year before the money is earned.


2. When the money can be paid out: You must set a fixed schedule or a specific "trigger event" (like retirement or disability) at the start.


3. No "haircuts" or accelerations: You can’t just change your mind and take the cash early because you want to buy a vacation home.

What Types of Plans Does 409A Impact?

The "reach" of 409A is surprisingly long. It doesn't just apply to traditional retirement plans; it covers almost any arrangement where an employee has a "legally binding right" to compensation that will be paid in a future year.

1. Traditional Nonqualified Deferred Compensation (NQDC)

Whether it’s a 401k Mirror Plan or a Supplemental Executive Retirement Plan (SERP), if you are deferring income to a later date, you are in 409A territory. This is the "bread and butter" of executive benefits, and it requires strict adherence to election timing.

2. Phantom Stock and SARs

If you are giving employees the "ownership feel" without actual equity through Phantom Stock or Stock Appreciation Rights (SARs), those plans must be carefully structured. If the payout doesn't align with 409A-permissible triggers, you could be looking at a massive tax bill for your people.

3. Severance Agreements

Many people are surprised to learn that severance packages can trigger 409A. If the payout extends beyond a short-term window (usually 2.5 months after the end of the year), the IRS views it as deferred compensation.

4. Bonuses and Commissions

If a bonus earned this year is paid out more than 2.5 months into next year, it might inadvertently become a 409A plan. Without the proper documentation, this "accidental" deferral can lead to a compliance nightmare.

The Split Dollar Connection: Is Your REBA Protected?

One of our favorite strategies at Schiff Executive Benefits is the Restricted Executive Bonus Arrangement (REBA), often utilizing a Split Dollar structure.

Does 409A impact Split Dollar?
The short answer is: It depends on how it's built.

Traditionally, "Loan Regime" Split Dollar arrangements: where the company lends the executive the premiums for a life insurance policy: are generally exempt from 409A because they are treated as loans, not deferred compensation. However, if the arrangement includes a promise to "forgive" the loan in the future or provides a specific cash payout that looks like a pension, it can quickly cross the line into 409A jurisdiction.

This is why "reverse engineering" the solution is so critical. You cannot simply use a cookie-cutter template. If your Split Dollar program isn't audited for 409A compliance, your "Golden Handcuffs" could turn into a lead weight for your executive.

The Cost of Getting It Wrong: Ramifications of a 409A Failure

In most tax scenarios, if the company makes a mistake, the company pays the fine. In 409A, the penalty falls almost entirely on the employee.

If the IRS determines that a plan has a "failure": either in how it was written (documentary failure) or how it was handled (operational failure): the consequences are devastating:

• Immediate Taxation: All the money currently deferred in the plan (and all similar plans) becomes taxable immediately, even if the executive doesn't have the cash in hand.


• The 20% Penalty Tax: On top of the regular income tax, the executive must pay an additional 20% excise tax.


• Premium Interest: The IRS charges a "penalty" interest rate on the taxes that would have been paid if the money hadn't been deferred.


• State Penalties: Many states (like California) add their own layer of penalties on top of the federal ones.

Imagine telling your most valuable VP that they owe the IRS $200,000 today for money they weren't supposed to touch for another ten years. That is a retention-killer. It is the exact opposite of what a "Perfect Plan" is meant to achieve.

Why Experience Matters: "The Room Where It Happened"

When we talk about 409A compliance, we aren't just reading a textbook. Our President, Matt Schiff, was literally in the room when these rules were being debated and drafted.

Back in 2003 and 2005, Matt served as a ranking member of the AALU’s NQDC Committee alongside industry giants like Michael Goldstein. They worked directly with officials like Dan Hogans (formerly of the IRS Treasury) to provide the technical expertise needed to shape Section 409A and IRC 101(j).

This isn't just "technical expertise": it's historical context. We understand the intent of the law, which allows us to help our clients navigate the gray areas where others might stumble.

As we often discuss on The Perfect Plan^®, the goal is to create a benefit structure that provides 100% protection and 100% income when needed most, without the looming shadow of an IRS audit.

Restoring Alignment and Retention

Does your current executive benefit plan pass the 409A stress test? Are your Split Dollar arrangements properly walled off from these penalties?

Don't wait for an audit to find out. 409A is complex, but your strategy doesn't have to be. We focus on Retirement Made Simple by ensuring your plans are fixed in dollar amount, period, and cash flow: all while staying firmly on the right side of the law.

If you’re ready to ensure your top talent is actually protected, let's sit down for a conversation. Sit back, grab your coffee, and let’s look at how we can secure your legacy.

Ready to see where your business stands? Start your Business Valuation and Gap Analysis here.

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Decanting Assets: Turning a $1M+ Portfolio Into Retirement Income You Can’t Outlive

If you are an executive within a few years of retirement and you have built more than a million dollars in investable assets, congratulations — you have won the hardest part of the game. But accumulation and income are two very different skills. The strategies that grew your wealth are not the strategies that will reliably pay you for the next thirty years. “Decanting” your assets — carefully repositioning them from a growth-focused pile into a structured, guaranteed income stream — is how you turn what you’ve saved into a paycheck you cannot outlive.

The Problem With a Million-Dollar Pile

A large 401(k), brokerage account, or deferred compensation balance feels like security, but a balance is not a plan. Left as an undifferentiated pile of market-exposed assets, that money is exposed to three retirement-specific risks: sequence-of-returns risk (a bad market early in retirement can permanently damage your income), longevity risk (outliving your money), and the very human risk of being too afraid to spend what you worked so hard to build. For high earners, there is a fourth: taxes. Without planning, large required distributions can push you into higher brackets exactly when you least expect it.

What “Decanting Your Assets” Actually Means

Decanting is the deliberate process of moving portions of your accumulated assets into vehicles designed to produce reliable, often guaranteed, lifetime income — while keeping other portions positioned for growth and legacy. Done well, it answers the only question that matters in retirement: where does my paycheck come from, and will it last? Rather than drawing down a single account and hoping the math works, you build layered, intentional income sources that cover your essential expenses with certainty and leave the rest free to grow.

Building Your Retirement Paycheck

The goal is to recreate, in retirement, the dependable paycheck you had during your working years — and ideally a “playcheck” on top of it for the life you’ve earned. This is the philosophy our friend and Perfect Plan® guest Tom Hegna champions: cover your basic needs with guaranteed income first, then invest the rest for upside. We help executives sequence their withdrawals, decide which assets to convert and when, and design the order of income so that taxes, market risk, and longevity all work in your favor instead of against you.

Why This Matters Most for Executives Near Retirement

Executives often carry a more complicated balance sheet than the typical retiree: concentrated company stock, nonqualified deferred compensation with its own distribution rules, sizable 401(k) and IRA balances, and sometimes a business interest to unwind. Each of these has different tax treatment and timing, and the decisions you make in the five years before and after retirement are largely irreversible. This is precisely the window where decanting your assets, with experienced guidance, makes the largest difference to your lifetime income.

Hear It Directly: The Perfect Plan® Podcast

In Episode 3 of The Perfect Plan® podcast, retirement-income expert Tom Hegna, CLU, ChFC, CASL, joins us to explain how to decant assets and build guaranteed income for life. Take a few minutes to hear how it works.

Related Resources

• Retirement Paycheck Design: Where Should Your Income Come From First?


• Retirement Made Simple: The Strategy of Fixed Cash Flow Planning


• The Perfect Plan®: Engineering 100% Income for Life’s What Ifs


• The Immediate Paycheck: 3 Steps to Turn Your 401(k) and NQDC Into Guaranteed Income


• The $150K Income Cliff: How to Turn Your 401(k) Into a Guaranteed Paycheck

Ready to Decant Your Assets Into Lifetime Income?

You spent a career building your nest egg. The next decision — how to turn it into income you can’t outlive — deserves the same care. If you’re an executive nearing retirement with $1 million or more in assets, schedule a confidential meeting with Schiff Executive Benefits, and we’ll help you design a decanting strategy built around the retirement you’ve earned.

 

Decanting assets is one strategy within the broader discipline of creating income in retirement, which addresses market, sequence, longevity, health, inflation, and liquidity risk together.

 

What Are Executive Benefits?

Executive benefits are specially designed compensation and retirement strategies that go beyond the standard, broad-based plans every employee receives. Where a 401(k) or group insurance plan is built for the whole workforce, executive benefits are built for the small group of people who drive most of a company’s value — the owners, founders, and key leaders you cannot afford to lose. They let a business reward, retain, and retire its most important people on a selective, flexible basis that qualified plans simply do not allow.

Why Business Owners Need More Than a 401(k)

Qualified retirement plans come with strict limits. Contribution caps, nondiscrimination testing, and coverage rules are designed to spread benefits evenly across all employees — which is exactly the problem when you want to do something extra for a handful of key people. A high earner often finds that a 401(k) replaces only a fraction of their income in retirement, leaving a significant gap. Executive benefits exist to close that gap and to give owners a tool they fully control: who participates, how much, and on what terms.

The Real Problem: Keeping Your Best People

Your most valuable executives are also the most recruitable. Competitors know who they are, and a strong leader walking out the door can take clients, institutional knowledge, and momentum with them. The right executive benefit creates “golden handcuffs” — a meaningful, often vesting, financial reason for a key person to stay and keep building with you. Retention is not about paying more today; it is about designing a future reward that is hard to walk away from.

The Main Types of Executive Benefits

There is no single “best” executive benefit — the right answer depends on your entity type, your goals, and the people you are trying to reward. Here are the core strategies, each explained in depth on its own page:

Executive Bonus Plans (Section 162)

The simplest place to start. A Section 162 executive bonus plan uses tax-deductible employer dollars to fund a personally owned policy for a key executive — straightforward, flexible, and especially powerful for pass-through entities. Mechanically, the company pays a bonus that the executive reports as taxable income, while the business generally takes a current deduction, so there is no complex plan document to maintain. Because the executive owns the policy from day one, the benefit is fully portable and vests immediately, which makes it an easy first step for owners who want to reward a key person without long-term administrative overhead.

REBA — Restricted Executive Benefit Arrangements

A bonus plan with strings attached. The REBA blueprint adds a vesting schedule and a recovery feature, turning a simple bonus into true golden handcuffs your executives actually want. Unlike a plain Section 162 bonus, the employer retains a contractual right to recover its contributions if the executive leaves before an agreed date, so the retention incentive has real teeth. It fits owners who like the tax simplicity of a bonus arrangement but need a meaningful reason for a key leader to stay and keep building the business.

Nonqualified Deferred Compensation (NQDC)

Let key people defer income beyond 401(k) limits and grow it tax-deferred. Our complete guide to NQDC covers how these plans are designed, funded, and secured — including the popular 401(k) Mirror Plan for restoring lost contribution room. Deferred amounts grow without current taxation and are taxed only when they are eventually paid out, which can be timed toward lower-income retirement years. Because these are nonqualified promises, the election and distribution timing must follow Section 409A rules carefully, making NQDC best suited to high earners who want to close the gap a capped 401(k) leaves behind.

Split Dollar Life Insurance

A sophisticated way to share the cost and benefit of a life insurance policy between the company and the executive. Split dollar architecture can deliver substantial tax-efficient value when designed correctly. The business and the executive split the premium payments and the policy's death benefit or cash value under a written agreement, allowing the company to fund coverage while the executive builds personal wealth. When the goals, ownership, and exit are structured with care, split dollar can move significant value to a key person at a fraction of the tax cost of an outright bonus.

Phantom Stock

Give key people the economic upside of ownership without handing over real equity. Phantom stock creates an ownership feel that aligns executives with long-term growth. Rather than issuing actual shares, the company grants units whose value tracks the business, then pays out in cash at a future event such as vesting, sale, or retirement. This lets owners reward performance and reinforce loyalty without diluting control, sharing voting rights, or opening the books to new equity holders.

SERPs and Employer-Funded Plans

A Supplemental Executive Retirement Plan is a company promise to pay a defined future benefit — an employer-funded pension for your most important people. The employer sets the benefit formula and typically funds it informally, often with company-owned life insurance, so the executive receives a predictable stream of retirement income the business controls. Because it is entirely employer-provided and highly customizable, a SERP is well suited to retaining one or two irreplaceable leaders whose departure would be costly to the company.

BOLI and COLI Funding

Many executive benefits are funded efficiently with institutional life insurance. Bank Owned Life Insurance (BOLI) and Corporate Owned Life Insurance (COLI) let the asset on your balance sheet recover the cost of the benefits you provide. The company owns the policy, and its cash value grows tax-deferred as a corporate asset that can offset the ongoing expense of a benefit program. At the insured's death, the tax-advantaged proceeds return to the business, effectively cost-recovering the plan and making these vehicles the funding backbone behind many SERP and deferred compensation arrangements.

Ownership Transition and Exit

When the goal is succession, an ESOP or a broader business succession plan turns your largest asset into a funded, tax-advantaged exit. An ESOP creates a built-in buyer by transferring shares to a trust for employees, giving the owner liquidity while rewarding the team that helped build the value. Paired with the right funding and timing, a succession strategy converts an illiquid ownership stake into a smooth, tax-efficient transition rather than a rushed sale.

How to Choose the Right Executive Benefit

The right plan starts with your goals, not a product. Are you trying to retain one irreplaceable leader, reward a small leadership team, build your own retirement, or plan an exit? Your entity type matters too — what works beautifully for a pass-through may be structured differently for a C corporation. The strongest plans are reverse-engineered from the outcome you want, then funded in the most tax-efficient way available. That is the heart of what we call The Perfect Plan®.

Talk to a Specialist

Executive benefits reward your power to make decisions about who you keep and how you retire. If you want to explore which strategy fits your business, schedule a meeting with Schiff Executive Benefits and we’ll help you design a plan around your goals.

 

BOLI for banks, COLI for corporations ![[HERO] Bank and corporate executives collaborating on BOLI and COLI planning for employee benefits and executive retention.](https://images.pexels.com/photos/3183150/pexels-photo-3183150.jpeg)

In business, clarity beats complexity. The right tool in the right hands can solve the right problem. The wrong tool, even if it looks similar on paper, creates confusion fast.

If you are a bank leader, you do not need to wonder whether COLI belongs on your balance sheet. It does not. If you are running a corporation, LLC, or partnership, you do not need to sort through BOLI literature. It is not your vehicle.

At Schiff Executive Benefits, we spend our days answering these "What If's." What if top talent leaves? What if retirement costs are rising faster than expected? What if a buy-sell obligation shows up before you are financially ready? We do not start with a product. We reverse engineer solutions based on your goals, your entity type, and your regulatory environment.

That is why this conversation is not about competition between BOLI and COLI. It is about fit. Both use employer-owned life insurance mechanics. Both can support long-term executive benefit planning. But they belong in different worlds.

The Right Tool for the Right Job

The easiest way to frame this is simple.

If you are a bank, credit union, or thrift, you are in the BOLI world.
Bank-Owned Life Insurance is a specialized asset class for financial institutions. It is used to help informally fund employee benefits and generate tax-advantaged income on the institution's balance sheet. It is also heavily regulated by the OCC, FDIC, and state banking departments, which means design, due diligence, and administration matter. You can learn more about our specific BOLI consulting services here.

If you are a corporation, LLC, or partnership, you are in the COLI world.
Corporate-Owned Life Insurance is the broader planning tool for non-bank businesses. It is often used to support executive retention strategies, key-person coverage, buy-sell planning, and nonqualified deferred compensation (NQDC) plans. For companies evaluating deferred compensation design, it also pairs naturally with broader executive benefit planning.

The mechanics may be similar. The use cases may overlap at a high level. But the entity determines the vehicle.

 

Where COLI Fits in the Corporate World

For corporations, LLCs, and partnerships, COLI is often part of a much broader retention and succession strategy. Many business owners are asset rich and cash poor. Their value is tied up in the business. That works well until a buyout, retirement, death, or executive transition forces a liquidity event.

If you have a buy-sell agreement in place, how will it be funded? If a key executive retires, how will you replace that talent cost-efficiently? If your best people are being recruited, what are you doing today to make staying more valuable than leaving?

This is where COLI can shine. A properly structured plan can help fund obligations tied to executive retention, deferred compensation, key-person risk, and ownership transition. It can create what we call an Ownership Feel to Non-Owners while helping the business maintain control, liquidity, and long-term alignment.

For banks, those same broad concerns may exist. But the funding vehicle is BOLI, not COLI. That distinction matters.

The "In the Room" Expertise: IRC 101(j) and 409A

Rules matter. Entity type matters. Documentation matters. This is where a lot of well-meaning advisors get lost.

When we talk about BOLI and COLI, we are not reading from a brochure. Matt Schiff brings a deep technical legacy to this work. Back in 2003 and 2005, he was in the room where it happened. As a ranking member of the AALU's NQDC Committee, he worked alongside Michael Goldstein to help draft the very laws that govern these plans today: IRC 409A and IRC 101(j).

That matters because these rules do not disappear just because you picked the right entity-specific vehicle. IRC 101(j) and 409A apply to both BOLI and COLI where relevant. Whether you are a bank implementing BOLI or a corporation structuring COLI around deferred compensation, technical compliance is still the backbone of a successful outcome.

If you want to hear more about that era and the technical nuances of these regulations, I highly recommend listening to my podcast interview with Dan Hogans, who was formerly with the IRS Treasury and was a key architect of these rules.

The 101(j) Trap

One area where many generalist advisors trip up is IRC 101(j). This regulation governs employer-owned life insurance. To keep the death benefits of a BOLI or COLI policy income-tax-free, you must comply with strict notice and consent requirements before the policy is issued.

If you fail to get the employee's written consent or fail to file the annual IRS Form 8925, the death proceeds that should help the business can suddenly become taxable income. We see this all too often in legacy plans that have never been audited. At Schiff Executive Benefits, we make sure your program is designed to comply from day one, Restoring Alignment and Retention to your organization.

The Perfect Plan^® Starts with the Right Vehicle

In today’s competitive landscape, good enough benefits do not cut it. Your best people are being recruited every single day. To keep them, you need a strategy that fits your organization and speaks directly to the outcomes your leadership team cares about.

This is why we developed The Perfect Plan^®. It is not just a product. It is a philosophy. The process starts by identifying the right vehicle for the right entity, then designing the plan around the outcome.

That means:

• Banks may use BOLI to help fund employee benefits and create tax-advantaged balance sheet support.


• Corporations, LLCs, and partnerships may use COLI to support Deferred Compensation (NQDC), executive retention, key-person coverage, and buy-sell planning.


• Both require thoughtful design, regulatory awareness, and coordination with your broader advisory team.

Imagine telling your top executive: If you stay with us for the next ten years, we have a plan that provides 100% income when you need it most in retirement, and 100% protection for your family if something happens to you tomorrow.

That is the power of a properly structured plan. It aligns the executive’s personal financial goals with the company’s long-term health.

Why the "Reverse Engineering" Approach?

Most brokers start with a product. We do not work that way.

We work as a broker with any carrier, which allows us to stay agnostic. We start with your "What If's."

• Are you a bank trying to offset benefit costs efficiently?


• Are you a corporation preparing for a business buyout?


• Are you concerned about the cost of replacing a senior executive?


• Are you looking for 100% cost recovery for the employer?


• Are you trying to keep your top talent from leaving?

Once we have the goal, we reverse engineer the solution. We work alongside your existing team of advisors: your Accountant, Attorney, and TPA: to ensure that the BOLI or COLI structure fits your legal, tax, and cultural framework.

Your Next Steps

Building a business is hard. Protecting it should not be. The first step is simple: identify your world.

If you are a bank, credit union, or thrift, your conversation starts with BOLI and the banking guidance that surrounds it. If you are a corporation, LLC, or partnership, your conversation starts with COLI and how it supports retention, buy-sell planning, and deferred compensation.

If you are ready to see how the right vehicle fits into your situation, I invite you to take a low-pressure first step. Use our Business Valuation tool to get a clearer picture of what you have built.

From there, we can sit down, grab a coffee, and talk through the practical next move. If you want to go deeper first, explore our Deferred Compensation and NQDC planning page, our COLI strategy overview, or our BOLI consulting page for banks.

To stay updated on the latest strategies for business owners and executives, visit our latest posts here or join the conversation over at The Perfect Plan^® on YouTube.

Learn more: our complete guide to Bank Owned Life Insurance (BOLI) and Corporate Owned Life Insurance (COLI).

The strength of any mission-driven organization is measured by the quality of its leadership. While a not-for-profit exists to serve the public good, it operates in a competitive talent market where the "golden handcuffs" of the corporate world are often standard. To attract and retain the visionaries capable of navigating complex philanthropic and operational landscapes, tax-exempt organizations must look beyond standard salaries and 403(b) plans.

However, the regulatory environment for executive benefits in the nonprofit sector is far more restrictive than for-profit Corporate Owned Life Insurance (COLI) or traditional NQDC arrangements. With the recent expansion of the Section 4960 excise tax under the One Big Beautiful Bill Act (OBBBA), the stakes have never been higher.

If you are a CFO, Board Member, or Executive Director, understanding the interplay between 457(b) plans, 457(f) plans, and the $1 million compensation cap is no longer optional: it is a fiduciary necessity.

The Foundation: 457(b) Eligible Deferred Compensation Plans

The most common nonqualified deferred compensation (NQDC) tool for tax-exempt entities is the 457(b) plan. Often referred to as a "Top Hat" plan, it is designed for a select group of management or highly compensated employees.

In many ways, a 457(b) feels like a 401(k) or 403(b) but without the rigorous non-discrimination testing. It allows executives to defer a portion of their salary, lowering their current taxable income while building a retirement nest egg.

Key Features of the 457(b):

• 2026 Deferral Limits: For 2026, the normal elective deferral limit is $24,500.


• Catch-Up Provisions: Unlike governmental 457(b) plans, non-governmental tax-exempt plans do not allow for the standard age-50 catch-up. However, they do offer a special "three-year catch-up" that allows participants to defer up to twice the normal limit ($49,000 in 2026) in the three years prior to the plan’s normal retirement age.


• Unfunded Requirement: To maintain its tax-deferred status, a 457(b) plan must remain "unfunded." This means the assets are technically owned by the employer and subject to the claims of the organization's general creditors.


• Taxation: Contributions and earnings are not taxed until they are distributed to the employee, typically at retirement or separation from service.

While the 457(b) is an excellent baseline, the relatively low contribution limits often fall short of the retention goals for top-tier executives. This is where the 457(f) enters the conversation.

The Powerhouse: 457(f) Ineligible Deferred Compensation Plans

When an organization needs to provide a significant retention incentive or a substantial retirement benefit that exceeds the 457(b) caps, they turn to the 457(f) plan. These plans are "ineligible" only in the sense that they are not subject to the contribution limits of Section 457(b).

A 457(f) plan allows an employer to credit substantial amounts to an executive's account, but there is a major technical catch: the Substantial Risk of Forfeiture (SRF).

The SRF and Taxation

Under IRC Section 457(f), deferred amounts are taxable to the executive the moment they vest: not when they are paid out. For a plan to successfully defer taxes, the executive must be required to perform "substantial future services." If they leave before the vesting date, they forfeit the benefit.

This "all or nothing" nature makes the 457(f) an incredibly potent retention tool. However, it also creates a significant tax event. Because the entire vested amount (including earnings) becomes taxable income in a single year, it can push an executive into the highest possible tax bracket and, more importantly, trigger the Section 4960 excise tax for the organization.

Technical Expertise in the Room

Navigating 457(f) plans requires a deep understanding of IRC 409A and 101(j). At Schiff Executive Benefits, we bring a unique perspective to these regulations. Our President, Matt Schiff, was "in the room where it happened," helping draft these laws in 2003 and 2005 as a ranking member of the AALU’s NQDC Committee alongside Michael Goldstein.

We don't just read the rules; we understand the intent behind them. This expertise is critical when designing a Perfect Plan^® that balances executive reward with organizational compliance.

The New Reality: Section 4960 and the $1M Excise Tax

The most significant shift in the nonprofit benefits landscape is the expansion of the Section 4960 excise tax. This is a 21% tax imposed on the employer (the tax-exempt organization) for remuneration paid to a "covered employee" in excess of $1 million.

For years, many organizations felt safe because this tax only applied to the top five highest-compensated employees. However, the One Big Beautiful Bill Act (OBBBA) has fundamentally changed the definitions.

The OBBBA Expansion

Under the new rules, the definition of a "covered employee" has expanded dramatically. It now includes any employee or former employee whose remuneration exceeds $1 million. The "top five" threshold is gone. If a mid-level specialist has a massive 457(f) vesting event that pushes their total compensation over the $1 million mark in a single year, the organization is on the hook for the 21% excise tax on every dollar over that limit.

Why This Matters for 457(f) Plans

Most 457(f) plans are designed with "cliff vesting": for example, a $500,000 credit that vests after five years. If that executive is already making $600,000 in salary and benefits, the $500,000 vesting event brings their total remuneration to $1.1 million.

The organization would then owe a 21% tax on that extra $100,000. This unexpected cost can wreak havoc on a nonprofit budget and create optics issues with donors or board members who may not understand why the organization is paying an "excess compensation" tax to the IRS.

Planning Implications: Restoring Alignment and Retention

The goal of executive benefits is to create alignment between the leader’s success and the organization’s mission. When a plan triggers a massive, unbudgeted tax penalty, that alignment is broken.

Effective planning in the OBBBA era requires a "reverse-engineered" approach. Instead of simply picking a dollar amount and a vesting date, we must look at the total compensation trajectory of every key employee.

1. Staggered Vesting Schedules

Rather than a single "cliff" vesting date that creates a compensation spike, we often recommend staggered vesting. By spreading the vesting of 457(f) benefits over several years, we can keep the annual remuneration below the $1 million threshold, avoiding the excise tax entirely while still providing the same total value and retention incentive to the executive.

2. Coordination with 457(b)

Maximizing the 457(b) deferrals is the first line of defense. By pushing as much as possible into the "eligible" plan where taxation is deferred until distribution, we reduce the pressure on the 457(f) "ineligible" plan.

3. Implementing The Perfect Plan^®

Every organization has a unique culture and a specific set of "What Ifs."

• What if a senior exec retires, and the replacement cost is higher than anticipated?


• What if top talent leaves for a for-profit competitor?


• What if a vesting event triggers a tax penalty that exceeds the budget?

Our process focuses on Employee Retention by designing programs that are cost-effective for the employer and truly rewarding for the executive. We ensure every program is IRC 409A compliant and structured to mitigate the impact of Section 4960.

Key Takeaway for Board Members and CFOs

The era of "set it and forget it" deferred compensation for nonprofits is over. If your organization has existing 457(f) arrangements, you must audit them immediately to identify potential "tax bombs" created by the expanded OBBBA covered employee definition.

At Schiff Executive Benefits, we specialize in helping not-for-profits map their deferred compensation arrangements, identify vesting risks, and restructure plans to ensure they remain a tool for growth: not a source of tax liability.

Is Your Plan Still "Perfect"?

Don't wait for a $1 million vesting event to discover your excise tax exposure. Let's sit back, grab a coffee, and review your current executive benefit structure. We work alongside your existing advisors: your accountants and attorneys: to provide the technical expertise required in today's shifting regulatory landscape.

Ready to protect your mission and your talent?

Click here to get started with a confidential business review and valuation.

Whether you are looking to reward a long-tenured leader or attract a new visionary to your team, we are here to help you build The Perfect Plan^®.

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