Qualified plans
A qualified plan is a retirement plan established by an employer to provide retirement benefits for employees and their beneficiaries. Qualified plans must adhere to requirements set by the Internal Revenue Code, the Employee Retirement Income Security Act of 1974 (ERISA) and the Department of Labor.

The primary characteristics of qualified plans:

  1. Tax deduction - The employer receives a tax deduction for contributing to the retirement plan.
  2. Tax deferral - Employees pay no taxes on the contributions made on behalf or on earnings until the plan benefits are distributed to them upon retirement.
  3. Nondiscrimination -Qualified plans may not discriminate in favor of highly compensated employees over nonhighly compensated employees.

Nonqualified plans
A nonqualified plan is an employer - sponsored retirement plan or other deferred compensation plan that does not meet Internal Revenue Code or ERISA requirements for qualified plans. As a result, they do not enjoy the same tax advantages of a qualified plan, but they are easier to set up since regulatory requirements are less burdensome.

Nonqualified plans are used most frequently to attract and retain highly paid executives. They often are used to supplement qualified plans.

Primary characteristics of nonqualified plans:

  1. Discrimination - An employer uses a nonqualified plan to provide extra incentives above and beyond what rank-and-file employees receive. Because these plans do not enjoy the same tax benefits as qualified plans, they are allowed to discriminate.
  2. No tax deduction -An employer receives no tax deduction for contributing to a nonqualified retirement plan.
  3. Tax deferral - A participant in a nonqualified plan can defer receipt of taxable income to a future date.
  4. No creditor protection - Deferred compensation under a nonqualified plan cannot be secured, meaning it can be subject to the claims of creditors if a company encounters financial difficulty.

Types and Provisions of Qualified Plans

Related Articles
  1. Retirement

    Comparing Qualified And Non-Qualified Plans

    Qualified and non-qualified retirement plans are created by employers to benefit their employees.
  2. 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.
  3. Retirement

    How Non-Qualified Deferred Compensation Plans Work

    These tax-advantaged retirement savings plans have their pros and cons, and employers and employees must follow strict guidelines.
  4. Retirement

    The Basics Of A 401(k) Retirement Plan

    This plan has become one of the most popular retirement options. Find out why.
  5. Retirement

    This Is Why Your Employer Should Offer a 401(k)

    Understand the unique benefits that come with a small business offering a retirement savings plan such as a 401(k) to current and future employees.
  6. Financial Advisor

    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.
  7. Managing Wealth

    Deferred Compensation Plans for Nonprofits

    Learn about the two types of deferred compensation plans that nonprofit companies can use to allow high-ranking employees to increase their retirement savings.
  8. Financial Advisor

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

    These plans resemble 401(k) plans in many respects, but are specially designed for nonprofit entities.
Frequently Asked Questions
  1. Depreciation Can Shield Taxes, Bolster Cash Flow

    Depreciation can be used as a tax-deductible expense to reduce tax costs, bolstering cash flow
  2. What schools did Warren Buffett attend on his way to getting his science and economics degrees?

    Learn how Warren Buffett became so successful through his attendance at multiple prestigious schools and his real-world experiences.
  3. How many attempts at each CFA exam is a candidate permitted?

    The CFA Institute allows an individual an unlimited amount of attempts at each examination.Although you can attempt the examination ...
  4. What's the average salary of a market research analyst?

    Learn about average stock market analyst salaries in the U.S. and different factors that affect salaries and overall levels ...
Trading Center