What is a Non-Qualified Retirement Plan?
A non-qualified retirement plan is a type of retirement savings plan that does not meet the requirements set by the Internal Revenue Code, and thus, are not eligible for the same tax benefits as qualified plans. Unlike qualified plans such as 401(k) or traditional IRAs, these plans do not offer tax deferral on contributions or earnings.
Key Characteristics
- No Contribution Limits: Non-qualified plans often allow for larger contributions compared to their qualified counterparts, making them attractive for high-income earners.
- Flexible Design: Employers can customize the plan’s features, benefits, and distribution methods to suit their needs.
- Taxation on Distribution: Unlike qualified plans, distributions from non-qualified plans are taxed as ordinary income when received.
Types of Non-Qualified Plans
Common types include deferred compensation plans, excess benefit plans, and split-dollar life insurance arrangements. These plans are often used to attract and retain key employees by providing retirement benefits above and beyond those available in qualified plans.
Considerations
It is crucial for participants to understand that non-qualified plans carry more risk since they are not protected by ERISA, meaning benefits could be jeopardized in the event of employer bankruptcy. Therefore, thorough diligence is recommended when exploring such options.