Series 66

Special Issues for Retirement Plans - Non-Qualified Retirement Plans

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 However, earnings on these plans are tax-deferred until withdrawn.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




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