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 However, earnings on these plans are tax-deferred until withdrawn.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. Financial Advisor

    4 Compensation Plans for Wealthy Earners

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

    The 401(k) and Qualified Plans Tutorial

    Learn about eligibility requirements, contributions and distribution rules for these retirement 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. Managing Wealth

    Benefits of Deferred Compensation Plans

    Understand the difference between a qualifying or nonqualifying deferred compensation plan. Learn about the benefits of a deferred compensation plan.
  5. Financial Advisor

    Retirement Planning for the Self-Employed

    How to select a qualified retirement plan if you are self-employed and have no employees.
  6. 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.
  7. 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.
  8. Financial Advisor

    What's a Qualified Retirement Plan?

    Employers establish qualified retirement plans to help their employees save money.
  9. Financial Advisor

    Understanding Rules on Defined Benefit Pension Plans

    Defined benefit plans offer advantages to both employers and employees. Employers must understand the federal tax rules when establishing these plans.
Frequently Asked Questions
  1. What are Common Examples of Monopolistic Markets?

    Discover what causes real instances of market monopoly, how it persists and where monopoly privilege is most common in the ...
  2. What is the gold standard?

    The gold standard is a monetary system where a country's currency or paper money has a value directly linked to gold, but ...
  3. What's the most expensive stock of all time?

    The most expensive publicly traded stock of all time is Warren Buffett’s Berkshire Hathaway.
  4. What is a "socially responsible" mutual fund?

    As the name suggests, socially responsible mutual funds invest exclusively in socially responsible investments.
Trading Center