Beyond the 401(k) limit

A senior executive earning several hundred thousand dollars a year can defer only a fraction of income into a 401(k). Nondiscrimination testing can push that number lower still. The result is a replacement ratio problem: the plan replaces a meaningful share of a middle manager's income and a small share of an executive's.

The gap is usually filled with taxable brokerage assets and employer stock — which concentrates risk in the same company that already pays the salary. Supplemental planning exists to diversify both the tax treatment and the source of the money.

In a Section 162 arrangement, the employer pays a bonus that the executive uses to fund a personally owned cash value life insurance policy. The bonus is generally deductible to the employer as reasonable compensation and taxable to the executive. The executive owns the policy outright from day one — there is no forfeiture risk if the company changes hands.

A "double bonus" grosses the payment up so the executive nets the intended premium after tax. A restricted endorsement bonus arrangement (REBA) adds a vesting restriction that limits access to cash value for a stated period — the retention mechanism companies usually want.

NQDC plans let executives defer income beyond qualified limits, but the deferred balance remains a general unsecured obligation of the employer. If the company fails, the executive is a creditor. Section 409A governs election timing and distribution triggers, and violations create immediate taxation plus penalty.

Corporate-owned life insurance is frequently used as the informal funding vehicle behind an NQDC promise. That does not secure the benefit for the executive — it gives the employer an asset positioned to match the liability.

A properly structured, overfunded policy gives an executive tax-deferred accumulation, access through policy loans that are generally not taxable while the contract stays in force and outside modified endowment status, and a death benefit that passes income-tax-free under IRC § 101(a). It is not a replacement for a 401(k) match or an investment portfolio. It is a third tax bucket.

The failure mode is predictable: a minimally funded policy sold on a maximum illustrated rate, with loans taken aggressively and no monitoring. Funding discipline and conservative crediting assumptions determine whether this works.

RSUs, options, and ESPP shares create timing problems that are as important as the accumulation itself. A vesting cliff or a liquidity event can produce a single-year income spike, and the planning question is what to do with the proceeds — diversify, pre-fund a permanent policy, or stage an annuity purchase for future income.

This work belongs in coordination with the executive's CPA. See our referral protocol for CPAs and attorneys for how that collaboration is typically structured.

A business owner controls the plan design, the timing of income, and the entity structure. An executive controls almost none of that. The strategy set is therefore different: owners optimize the entity, executives optimize around it. That distinction runs through every recommendation on this page — and through how we segment client work.