How can a single-owner C-Corp retirement plan use excess profits to provide tax-advantaged income while maintaining flexibility and estate planning benefits? Today, we’re going to compare two strategies designed for single-owner C-Corps and take a close look at each strategy from a tax, retirement, and estate perspective:
The two strategies are:
- Loan Regime Split-Dollar to a Spousal Lifetime Access Trust (SLAT) owning an Indexed Universal Life (IUL).
- Non-Qualified Deferred Compensation (NQDC) Plan funded informally with Corporate-Owned Life Insurance (COLI/IUL).
What framework are we using to compare C-Corp retirement plan funding strategies?
First, we’re assuming that the corporate tax rate is 21%, and the personal tax rate is 37% federal, plus 3.8% NIIT (40.8% effective).
Second, although Indexed Universal Life (IUL) policies are assumed to be used, any type of permanent policy with cash value could be applicable.
Third, we’re using a long-term assessment of each strategy’s retirement benefits with a focus on after-tax income, estate planning impact, and flexibility rather than precise numeric projections.
Strategy #1: Split-Dollar Loan Regime with SLAT
Here’s how strategy number one works: the corporation lends premium dollars to a grantor SLAT, which owns an IUL policy on the business owner/SLAT grantor.
Loan interest is paid annually by the SLAT at the Applicable Federal Rate, is evidenced by a promissory note, and is collateralized by the cash value within the policy and the death benefit, to the extent that there is not sufficient cash value in the policy.
Split-dollar loan to SLAT benefits in cash value and savings after death.
Cash value within the policy grows without tax drag and allows tax-free access for the owner; access is available via policy wash loans throughout retirement.
The policy’s death benefit repays the corporate loan at death. Excess proceeds remain in the SLAT, which is outside the grantor’s or business owner’s taxable estate.
Important Note for SLAT Strategies: The repayment of a corporate loan increases the company’s value, which is included in the estate if the owner still holds shares at the time of death.
The big picture effects of split-dollar to SLAT strategies for families and estates.
Under a split-dollar to SLAT strategy, the descendant’s family enjoys tax-free access to policy values during their lifetime.
Also, an estate exclusion applies to the excess death benefit beyond the loan repayment; that means zero NIIT, payroll tax, or income tax drag on trust distributions—all positive aspects of a single-owner C-Corp retirement plan.
Strategy #2: Non-Qualified Deferred Compensation (NQDC)
With an NQDC strategy, the corporation signs a contractually binding agreement to pay deferred compensation upon retirement or other triggering events. At retirement, COLI/IUL policies may informally fund these obligations—but plan assets remain subject to employer creditors.
NQDC tax and estate benefits.
NQDC cash value is taxed as ordinary income when the owner receives the benefits; the corporation takes a matching deduction.
Payments are included in the estate if they are still payable at the time of death.
NQDC effects from a tax and estate perspective.
Going with an NQDC strategy means distributions are tax-deferred but ultimately will be subject to full income taxation.
Critically, an NQDC approach offers little advantage to a sole owner. The tax benefits and exposures between the employer and employee, respectively, cancel each other out.
Finally, let’s compare the performance of both strategies in the income, estate, payroll, and NIIT tax landscape.
Split-dollar loan to SLAT specifics.
Cash value accessed through policy loans is generally not considered taxable income, which means that income tax drag will not be a problem under an SLAT strategy.
For estate taxes, the excess death benefit (beyond loan repayment) is outside the taxable estate if owned by the SLAT, creating true estate tax leverage.
Finally, SLAT strategies prevent payroll or NIIT exposure on trust distributions because benefits are not treated as wages.
The results are good.
Split-dollar loans to SLAT strategies are coordinated efficiently across all three tax regimes — income, estate, and payroll.
NQDC plan specifics.
Owners’ distributions will be taxed as ordinary income as soon as the distributions are paid and at the owner’s full marginal rate.
Estate tax benefits are scarce, as well. Benefits that are still payable at death are included in the owner’s taxable estate, adding to estate tax exposure.
For payroll taxes, both the employer and employee must pay FICA/Medicare when deferred compensation vests, even if it has not yet been paid (the special timing rule). The present value of benefits is subject to payroll tax at vesting, resulting in a cash flow mismatch and an immediate tax drag.
The employer owes its match, with no deduction until payout; the employee pre-pays payroll taxes on amounts not yet received. Later growth escapes FICA, but all benefits are still fully income taxable at payout.
For NIIT, benefits are considered wage income and are exempt from the 3.8% NIIT tax for high earners.
The results are not so good.
NQDC strategies defer, but do not reduce, income tax burden over the long term. NQDC plans introduce estate inclusion risk and add upfront payroll tax obligations that reduce efficiency.
What’s the bottom line?
The split-dollar loan to SLAT route may prove more beneficial from a holistic tax perspective because it removes the triple hit of income, estate, and payroll taxes that an NQDC imposes.
While both strategies require careful design and compliance, the SLAT structure offers more opportunities for true tax minimization, not just tax deferral.
Administrative burdens differ.
Split-dollar loan regimes require the legal drafting of loan agreements, collateral assignments, and ongoing interest reporting.
Once implemented, ongoing administration of split-dollar loan regimes is relatively light, focused mainly on tracking policy performance and ensuring loan terms remain compliant.
What about NQDC plans?
First, NQDC plans require a formal, written plan that complies with IRC Section 409A.
Suppose the plan favors only highly compensated employees. In that case, the employer must send notice to the DOL via a one-time filing within 120 days, carefully deferring elections, implementing restricted distribution triggers, and maintaining ongoing compliance monitoring. Administration can be more burdensome, with higher exposure to penalties for errors in timing or structure.
Contrasting split-dollar structures and NQDC plans.
Split-dollar structures are typically simpler once established, while NQDC plans require more technical compliance and oversight over the long term.
Split-dollar SLAT strategies outperform NQDC plans according to virtually every metric.
For a single-owner C-Corp, the split-dollar SLAT generally provides more favorable after-tax income, estate planning advantages, and administrative simplicity than an NQDC plan.
While both strategies involve IUL performance assumptions and policy costs, the SLAT structure leverages tax-free access and estate exclusion benefits that the NQDC structure cannot match.
If you are a tax professional with a single-owner C-Corp client or client base, bring us into the conversation to find the most advantageous paths to tax reduction, retirement income, and estate tax efficiency.
Schedule a discovery call, and we’ll get started.
– Justin Baker, JD, LL.M., MBA
Advanced Estate Planning Attorney, Baker Wealth Strategies
