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 However, earnings on these plans are tax-deferred until withdrawn.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

Introduction
Related Articles
  1. Investing Basics

    Brokers and RIAs: One and the Same?

    Brokers and registered investment advisors have some key differences. Here's what you need to know.
  2. Professionals

    Understanding Series 6

    Upon successful completion of the Series 6, an individual will have the qualifications needed to sell open end mutual funds and variable annuities
  3. Professionals

    Top Strategies on How to Become a Stock Broker

    Gunning to be a stock broker and want an edge? Here's some veteran advice.
  4. Trading Systems & Software

    Steps to Starting Up an Independent Broker Dealer

    Launching your own broker-dealer is a lot of work, but the potential payoff is great, both personally and financially.
  5. Professionals

    Understanding Series 63

    Series 63 is a securities license that entitles the holder to sell securities in a particular state.
  6. Professionals

    How To Answer Option Questions On The Series 7 Exam

    Learn how to answer option questions on the Series 7 exam. Pass your Series 7 exam with the help of these tips.
  7. Insurance

    Municipal Bond Tips For The Series 7 Exam

    Learn to distinguish between general obligation and revenue bonds to ace this test.
  8. Retirement

    6 Proven Tips For Series 6 Success

    These techniques can help you pass this test without the added stress.
  9. Insurance

    Tips For Passing The Series 6 Exam

    Find out what you can do during the test to make sure you get a passing score.
  10. Professionals

    Banker Or Broker: Which Career Is Right For You?

    Bankers and stock brokers may share similar traits, but there are many differences between the two professions.
RELATED TERMS
  1. Series 6

    A securities license entitling the holder to register as a limited ...
  2. Series 79

    A examination to ensure a candidate is qualified to become a ...
  3. Research Analyst

    A person who prepares investigative reports on equity securities. ...
  4. Series 34

    An exam required for individuals seeking to engage in off-exchange ...
  5. Financial Advisor

    One who provides financial advice or guidance to customers for ...
  6. Series 23

    An exam offered by the Financial Industry Regulatory Authority ...
RELATED FAQS
  1. If I have only a limited amount of time to study for the Series 6, what should I ...

    The Series 6 Investment Company and Variable Contracts Products Representative Qualification Examination is administered ... Read Full Answer >>
  2. What role does the 'chip cycle' play in the electronics sector?

    There are several highly acclaimed private Series 6 Exam courses in the United States. Many can be completed online. Popular ... Read Full Answer >>
  3. What does passing the Series 6 enable me to do?

    The Series 6, or the Investment Company Products/Variable Contracts Limited Representative, exam is administered by the Financial ... Read Full Answer >>
  4. What are the differences between the Series 6 exam and the Series 7 exam?

    The Financial Industry Regulatory Authority (FINRA) offers a variety of licenses that must be obtained before conducting ... Read Full Answer >>
  5. Do I have to successfully complete the Series 7 exam before I can register for the ...

    There are no prerequisites to register for the Series 63 exam. However, once you have registered for the exam, you must schedule ... Read Full Answer >>
  6. I completed the Series 6, do I have to complete the entire Series 7?

    After having written the Series 6 examination, there would be significant overlap with the Series 7 in areas such as mutual ... Read Full Answer >>
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!