Unlike qualified plans, such as defined benefit and defined contribution plans, some plans are nonqualified, meaning they do not meet ERISA guidelines and the employer therefore may not deduct contributions.

However, earnings on these plans are tax deferred until withdrawn.
  • 457 plan - The most common nonqualified retirement plans are deferred compensation plans set up under IRS Code Section 457. These plans are available to state and local government workers and employees of certain nonprofit employers. Like 401(k) and 403(b) plans, a 457 plan allows employees to reduce their taxable income by setting aside a portion of their salary for retirement. A 457 plan may be offered to workers in addition to other defined contribution plans.
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 nonqualified, 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 nonqualified 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.
Education Plans

Related Articles
  1. 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.
  2. 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.
  3. Financial Advisor

    Retirement Planning for the Self-Employed

    How to select a qualified retirement plan if you are self-employed and have no employees.
  4. Retirement

    This Is Why Your Employer Should Offer a 401(k)

    Understand the unique benefits that come with a small business offering a retirement savings plan such as a 401(k) to current and future employees.
  5. Retirement

    The Basics of a 401(k) Retirement Plan

    This plan has become one of the most popular retirement options. Here's why.
  6. Financial Advisor

    Advising FAs: Explaining Estate Planning to a Client

    As the old saying goes, you can't take it with you. For this reason, it is important to have a current estate plan in place to protect your family and belongings.
  7. Small Business

    Plans The Small-Business Owner Can Establish

    Don't hesitate to adopt a smart plan for you and your employees.
  8. Retirement

    403(b)s Among Plans Not Covered by New Fiduciary Rule

    Some retirement plans, including 403(b)s, are not covered by the DOL's new fiduciary rule. Here's what it means.
Frequently Asked Questions
  1. Why Do Most of My Mortgage Payments Start Out as Interest?

    Fear not: Over the life of the mortgage, the portions of interest to principal will change.
  2. What is the difference between secured and unsecured debts?

    The differences between secured and unsecured debt, and how banks buffer risks associated with each type of loan through ...
  3. How Many Times has Warren Buffett Been Married?

    Warren Buffett has been married twice in his life, but the circumstances surrounding the marriages were unconventional.
  4. What's the smallest number of shares of stock that I can buy?

    Many people would say the smallest number of shares an investor can purchase is one, but the real answer is not as straightforward. ...
Trading Center