A:

Qualified and non-qualified retirement plans are created by employers with the intent of benefiting employees. The Employee Retirement Income Security Act (ERISA), enacted in 1974, defines qualified and non-qualified plans.

Qualified plans are designed to offer individuals added tax benefits on top of their regular retirement plans, such as IRAs. Employers deduct an allowable portion of pretax wages from the employees, and the contributions and the earnings then grow tax-deferred until withdrawal.

Non-qualified plans are those that are not eligible for tax-deferral benefits. Consequently, deducted contributions for non-qualified plans are taxed when income is recognized. This generally refers to when employees must pay income taxes on benefits associated with their employment.

The main difference between the two plans is the tax treatment of deductions by employers, but there are other differences. A plan must meet several criteria to be considered qualified, including:

  • Disclosure - Documents pertaining to the plan's framework and investments must be available to participants upon request.
  • Coverage - A specified portion of employees, but not all, must be covered.
  • Participation - Employees who meet eligibility requirements must be permitted to participate.
  • Vesting - After a specified duration of employment, a participant's rights to pensions are non-forfeitable benefits.
  • Nondiscrimination - Benefits must be proportionately equal in assignment to all participants in order to prevent excessive weighting in favor of higher paid employees.

Learn more by checking out our Retirement Tutorials.

RELATED FAQS
  1. What is the best retirement plan option for a physician with her own practice, employees ...

    It is very unlikely that you will find a qualified plan or an IRA-based plan that will allow the employer to exclude other ... Read Answer >>
  2. Mike is a highly compensated employee of XYZ Company, his company has offered him ...

    The correct answer is b): One of the most common types of nonqualified retirement plans is the deferred compensation plan. ... Read Answer >>
  3. How does a defined benefit pension plan differ from a defined contribution plan?

    Learn the differences between defined benefit plans and defined contribution plans when reviewing employer-sponsored qualified ... Read Answer >>
  4. What is the difference between a 401(k) plan and a 457 plan?

    Discover how 401(k) plans are privately offered employee retirement plans, while 457 plans are typically available to public ... Read Answer >>
  5. Are Simple IRA plans subject to ERISA?

    Learn how the Employee Retirement Investment Security Act, or ERISA, guides the administration of Savings Incentive Match ... Read Answer >>
  6. What are qualified retirement plan types?

    Understand the different types of qualified retirement plans and what they mean in terms of employee and employer contribution ... Read Answer >>
Related Articles
  1. Retirement

    5 Lesser-Known Retirement And Benefit Plans

    These plans aren't widely used, but they fill a specific niche for employees in certain situations.
  2. Term

    What's a Qualified Retirement Plan?

    Employers establish qualified retirement plans to help their employees save money.
  3. Personal Finance

    Life Insurance Plans to Help Your Small Business Retain Employees

    How to use and design cash value life insurance plans as an incentive to help attract and retain key employees.
  4. Taxes

    401(k) And Qualified Plans: Conclusion

    By Denise ApplebyA qualified plan is established by an employer to provide retirement benefits for employees and their beneficiaries. Qualified plans can come in a few different flavors. Let's ...
  5. Retirement

    How Does a Pension Plan Work?

    A pension plan is a savings plan maintained by an employer on behalf of its employees for their retirement.
  6. Retirement

    Tough Times: Should You Dip Into Your Qualified Plan?

    401(k)s, pensions and profit-sharing plans can be a source of cash, but there are consequences to this option.
  7. Entrepreneurship

    Plans The Small-Business Owner Can Establish

    Don't hesitate to adopt a smart plan for you and your employees.
  8. Savings

    The 4-1-1 on 403(b) Plans

    These plans resemble 401(k) plans in many respects, but are specially designed for nonprofit entities.
  9. Retirement

    What's a Defined Contribution Plan?

    A defined contribution plan is a company retirement plan that specifies the amount of money contributed to it.
  10. Savings

    Is Your 401(k) Administrator Competent?

    The more that employees know about their employee 401(k) plans, the better. But what doesn't your administrator know?
RELATED TERMS
  1. Withdrawal Benefits

    The rights of an employee who has a qualified pension plan to ...
  2. Corporate Pension Plan

    A formal arrangement between a company and its employees - or ...
  3. Employee Contribution Plan

    A company-sponsored retirement plan where employees may elect ...
  4. Past Service

    Service to an employer that is recognized for the defined benefit ...
  5. Top Hat Plan

    A form of retirement plan available only to selected company ...
  6. SIMPLE IRA

    A retirement plan that can be used by most small businesses with ...
Trading Center