Series 6

By Investopedia AAA

Retirement and College Savings Plans - Nonqualified Employer-Sponsored Retirement Plans

Nonqualified employer-sponsored retirement plans are not required to meet specific IRS guidelines regarding contribution limits, vesting and employee coverage. Moreover, any contributions to these types of retirement plans do not grow tax-deferred.

Let's look at two types of nonqualified employer-sponsored retirement plans: deferred-compensation plans and payroll deduction plans.

  • Deferred-Compensation Plans: Deferred-compensation plans should not be confused with defined-contribution plans, nor with 457 governmental plans (also referred to as deferred compensation). They are simply contracts between employers and certain employees in which the employer agrees to pay a certain amount of compensation to the employee at a later date, usually at retirement or termination, and/or upon disability or death.

A deferred-compensation plan can be either funded or unfunded. Funded plans are backed by specific employer assets that are not accessible to creditors, while unfunded plans are backed only by the promise of the employer.

  • Payroll Deduction Plans: Payroll deduction plans are simply product-purchase services set up by the employer to provide cheaper life insurance, mutual funds, variable annuities and other benefits to employees. Employees usually purchase these special products and services with after-tax deductions from their paychecks. Some employers may also decide to match a certain percentage of the employee's contribution, although they are not required to do so.
Traditional IRAs

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