An employer wants to fund a retirement benefit for a key executive by purchasing life insurance on the executive. Under a nonqualified deferred compensation arrangement, the employer typically:

Why A is correct

In a nonqualified deferred compensation plan, the employer owns the life insurance policy and is the beneficiary. The employer pays the premiums and later pays the promised deferred compensation to the executive out of the employer's own funds (funded by the policy's cash value or death benefit). The employer's obligation is unfunded in the legal sense - the executive has no current tax liability and no secured right to the policy.

Why the other options are wrong

• B) The executive does not own the policy in a deferred compensation plan; ownership stays with the employer so the arrangement can remain nonqualified.
• C) Naming the family as beneficiary describes survivor income protection, not a deferred compensation retirement funding arrangement.
• D) The employer retains ownership throughout the arrangement; transferring ownership on day one would defeat the plan's structure.

Memory hook

Deferred comp = the employer owns the policy, banks the cash, and pays the executive later. Deferred, not detached.