Most companies know their 401(k) participation rate. Far fewer can say with confidence whether their executive benefit program is actually achieving anything, or whether they have a program at all, as opposed to a collection of products assembled over time without a clear organizing logic.
That distinction matters because the executive benefits conversation usually starts in the wrong place. It starts with products: someone proposes a deferred compensation plan, or a life insurance arrangement, or a cash balance structure. What rarely happens first is the more fundamental question: what are we actually trying to accomplish, for whom, and over what time horizon?
This is why many executive benefit programs underperform despite being technically sound. The products are legitimate. They just were not chosen for the right problem.
Understanding what the problems actually are is the starting point.
The Qualified Plan Ceiling
The gap begins with simple math. Annual 401(k) elective deferral limits are $24,500 in 2026, with an additional $8,000 catch-up available for participants age 50 and older. For an executive earning several hundred thousand dollars a year, those limits replace only a small fraction of income. Even with employer contributions added, the result is often a retirement accumulation path that falls well short of what the executive’s earnings pattern and future spending needs would suggest.
Nondiscrimination rules can tighten the ceiling further. Qualified plans must be designed and operated to benefit employees broadly, not just a small group of highly compensated individuals. In practice, that means an executive’s ability to maximize contributions can be constrained by participation patterns elsewhere in the workforce. That is not a design flaw. That is how the system was built.
At a certain income level, the limitation is not administrative. It is structural. And a structural problem requires a structural answer.
Non-Qualified Deferred Compensation: The Bridge
Non-qualified deferred compensation, or NQDC, exists largely because of that gap. A properly designed NQDC plan allows selected executives to defer compensation beyond the limits imposed on qualified plans, helping align taxable income with future liquidity needs, smooth retirement cash flow, and create a more meaningful long-term retention mechanism for key personnel.
It also introduces a different set of considerations. Unlike qualified plan benefits, deferred compensation is an unsecured obligation of the employer. The executive is relying on the company’s future ability to pay. That makes plan design only part of the exercise. The employer’s balance sheet, funding philosophy, and long-term commitment to the arrangement matter as much as the promise itself.
That is where the conversation often moves from benefit design to benefit financing.
Where Life Insurance Fits
Life insurance enters this discussion not primarily as a personal insurance solution, but as a corporate planning tool.
Corporate-owned life insurance (COLI) is purchased by the company on the lives of key executives, with the company as both owner and beneficiary. The cash value of a properly structured COLI policy accumulates on a tax-deferred basis. Death benefits are generally received by the company income-tax free under IRC Section 101(a). And critically, policy cash values can be accessed over time to fund NQDC distributions, turning an unfunded balance sheet liability into an asset-backed obligation.
The economics are compelling over a sufficient time horizon. Policy distributions used to fund benefit payments create a mechanism where the cost of the benefit is gradually offset by the asset’s performance and, eventually, by tax-free death benefit proceeds. The company recovers a meaningful portion of its benefit cost over the life of the program.
Split-dollar life insurance arrangements offer a separate but complementary application, allowing a company and an executive to share the costs and benefits of a permanent life insurance policy in ways that can serve both retention and estate planning objectives. These arrangements require careful structuring to comply with applicable Treasury regulations, and the tax treatment depends on which split-dollar regime governs the arrangement.
Key person life insurance addresses a different but equally important risk: the financial impact on the business if a critical executive dies unexpectedly. At senior levels, the loss may affect revenue, client relationships, and leadership continuity. Insurance cannot replace the person, but it can provide liquidity while the organization manages the disruption.
Cash Balance and Supplemental Retirement Plans
For business structures, particularly partnerships, where the ownership arrangement limits access to traditional NQDC pre-tax deferral, qualified cash balance plans can serve as an effective alternative. These defined benefit plans can allow for significantly higher annual contributions than 401(k) plans alone, with limits that increase with participant age and income. For senior partners and executives in their peak earning years, that difference is often substantial.
Cash balance plans credit participants with a contribution amount and a specified interest rate each year, accumulating a hypothetical account balance. They offer the predictability of a defined benefit plan with some of the portability of a defined contribution structure. In partnership-model firms, which we will address directly in next month’s post, they are often the most important pre-tax planning vehicle available.
Design Is the Discipline
The tools described here, NQDC, COLI, split-dollar, key person coverage, cash balance plans, are not interchangeable. Each addresses a specific set of problems, and executive benefits design is the discipline of understanding which tools apply to which situations, in which sequence, and at what cost to the organization.
The work is not choosing a product. The work is identifying which problem the organization is actually trying to solve, and then building toward it with enough deliberateness that the answer holds up over a ten or twenty-year horizon.
A company concerned about retaining a growth-stage executive team is solving for something different than a mature firm trying to finance long-term supplemental retirement obligations. A founder-owned business thinking about succession has different priorities than a professional partnership managing partner exits without straining future cash flow.
What connects all of these situations is the same underlying reality: qualified plans, standing alone, were never designed to solve these problems. Starting with that recognition, rather than with a product menu, is what separates executive benefits programs that perform from ones that merely exist.
Over the next two months, we’ll apply this framework to the specific dynamics of law firm partnerships and private equity-backed professional services firms; two contexts where the executive benefits gap is most consequential and most often underaddressed.
| Summit Legacy works with closely held businesses, professional services firms, and their advisors on executive benefits design across all of these structures. If these questions are active for your organization, we would welcome the conversation. |
