Annuities✓ Verified · outline & fact-checked · Sep 2026Difficulty 2/5
An employer may use annuities to fund a nonqualified deferred compensation arrangement primarily because the annuity:
Select an option to reveal the answer and the full 3-part explanation — free, no signup.
Answer & full 3-part explanation (select an option above, or peek)
Why B is correct
Nonqualified deferred compensation arrangements are commonly funded with annuity contracts because the annuity's cash value accumulates on a tax-deferred basis, building the assets needed to satisfy the employer's future obligation to the executive. The employer owns the annuity, and the executive has no current taxable income from the arrangement; the executive is taxed when the payments are actually received at retirement. The annuity serves as the funding vehicle for the promised benefit.
Why the other options are wrong
- A) The employer generally receives no current deduction when funding a nonqualified deferred compensation plan; deduction is deferred until the executive receives payments.
- C) The annuity funds the obligation but does not cancel it; the employer still owes the promised benefit to the executive.
- D) Executive deferrals under nonqualified plans are not deducted currently; taxation is deferred until payment, not deducted.
Memory hook
NQDC + annuity = the employer's own tax-deferred piggy bank that funds the executive's future paycheck.