Unlike qualified plans such as defined benefit and defined contribution plans, some plans are non-qualified, meaning they do not meet ERISA guidelines and, therefore, the employer may not deduct contributions. However, earnings on these plans are tax-deferred until withdrawn. The most common non-qualified retirement plans are deferred compensation plans, which are set up under IRS Code Section 457.

A 457 Plan is a type of non-qualified, deferred compensation plan established by state and local governments, and tax-exempt governments and employers. Eligible employees are allowed to make salary deferral contributions. Earnings grow on a tax-deferred basis and contributions are not taxed until the assets are distributed from the plan. Employees are allowed to defer up to 100% of compensation not exceeding the applicable dollar limit for the year. If the plan does not meet statutory requirements, the assets may be subject to different rules.

Exam Tips and Tricks
Consider these sample exam questions about retirement plans:

  1. A retirement plan is qualified if it:
    1. is established by an employer instead of an individual.
    2. qualifies for special tax treatment.
    3. provides special benefits for highly paid employees.
    4. is part of an IRA.

The correct answer is "b", since qualified plans must be established by the employer, but not all employer retirement plans are qualified.

  1. If a retirement plan is non-qualified, which one of the following statements is always TRUE:
    1. The plan is illegal and should be terminated.
    2. Investment earnings accumulate tax-free.
    3. The employer may not deduct the plan contributions.
    4. It is a defined benefit plan.

The correct answer is "c", since non-qualified plans never permit deductibility of the employer's contributions.

  1. The investment policy statement under a qualified plan can best be described as:
    1. a required document that contains the "legal list" of permissible investments in the plan.
    2. a written document that outlines the plan's investment objectives and guidelines.
    3. the list of prohibited transactions that the fiduciaries must not permit.
    4. a written document provided to the plan participants, to limit the trustees' legal liability for poor investment decisions.

The correct answer is "b", since the document is designed to provide guidance on investment decisions, not give a list of required or prohibited investments.

Introduction

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. Financial Advisor

    4 Compensation Plans for Wealthy Earners

    Here's what advisors need to know about non-qualified deferred compensation plans.
  3. 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.
  4. Financial Advisor

    Retirement Planning for the Self-Employed

    How to select a qualified retirement plan if you are self-employed and have no employees.
  5. Financial Advisor

    What's a Qualified Retirement Plan?

    Employers establish qualified retirement plans to help their employees save money.
  6. 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.
  7. 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.
  8. Retirement

    The Basics of a 401(k) Retirement Plan

    This plan has become one of the most popular retirement options. Here's why.
  9. Personal Finance

    Executive Deferred Comp: Understanding NQDC

    Non-qualifying deferred compensation offers benefits and risks for the execs who are eligible.
Frequently Asked Questions
  1. When are Beneficiaries of a Will Notified?

    Learn when the beneficiaries of a will must be notified, and understand how this requirement varies depending on whether ...
  2. Why Does Larry Page Pay Himself a $1 Salary?

    Google co-founder Larry Page continues to take an annual salary of only $1 as chief executive officer.
  3. What is Common Stock and Preferred Stock?

    Learn about the differences between common and preferred shares. Explore situations where preferred shares have more favorable ...
  4. Can CareCredit be Used for Family Members?

    Learn more about the available options that CareCredit offers to pay for out-of-pocket medical procedures with little to ...
Trading Center