A deferred compensation plan can only be informally funded but it is not required to be informally funded. Most plans are informally funded with either taxable securities or nontaxable securities. Companies acquire assets to hedge the liability created when a plan participant defers income. Informal plan funding can effectively mitigate and may eliminate any P&L impact by efficiently managing the company’s balance sheet.
The corporation will invest in assets and allocate the dollars received to mirror that of the plan participants’ investment allocations. This type of funding approach is called match funding (i.e., asset is equal to the liability).