Corporate-owned Nonqualified Annuity

[Guest Pat Metallic]

Does anyone have some information on what a corporate-owned nonqualified annuity is? I'm just looking for some background on it or some direction on where I could learn more about this type of annuity.

[Michael Devault]

Several years ago, deferred annuities were used to "fund" non-qualified deferred compensation programs. The tax deferred growth was an attractive accumulation vehicle in such plans. However, the Tax Reform Act of 1986 put the "ka-bosh" on that idea, because IRC Section 72(u) was added.

Under that section, to the extent of contributions made after February 28, 1986 to a deferred annuity held by a corporation, the contract is generally not treated as tax purposes as an annuity contract. Instead, income on the contract is treated as ordinary income received or accrued by the owner during the taxable year. Good bye, income tax deferral!

The National Underwriter Company has a couple of good sources of additional information. One is "The Annuity Handbook," and the other is "Tax Facts 1."

Hope this is of some benefit to you.

[Guest wmacdonald]

Some companies still use annuities, however they have them owned by the executive or a secular trust. We have one client, that buys the CEO a single premium deferred annuity for the present value of the increased SERP benefit. The executive pays current tax, and owns and controls the annuity. I think the previous ansewer gave you all the reason why the corporation shouldn't own them directly.