What Is a Non-Qualified Plan?

A non-qualified plan is a type of tax-deferred, employer-sponsored retirement plan that falls outside of Employee Retirement Income Security Act (ERISA) guidelines.

Non-qualified plans are designed to meet specialized retirement needs for key executives and other select employees. They can act as recruitment and/or employee retention tools. These plans are also exempt from the discriminatory and top-heavy testing that qualified plans are su♏bject to.

How a Non-Qualified Plan Works

There are four major types൲ of non-qualified plans:

• Deferred compensation plans
• Executive bonus plans
• Split-dollar life insurance plans
• Group carve-out plans

The contributionsꦗ made to these types of plans are usually nond🅷eductible for the employer and taxable for the employee.

However, they allow employees to defer taxes until retirement, when they presumably will be in a lower 澳洲幸运5开奖号码历史查询:tax bracket.

One of✤ the o🍬ther major goals of a non-qualified plan is to allow highly compensated employees to contribute to another retirement plan after their qualified retirement plan contributions have been maxed out, which usually happens quickly, given their level of compensation.

Deferred Compensation Plans

There are two types of deferred compensation plans: true deferred compensation plans and salary-continuation plans. The primary difference between the two is in the funding source. With a true deferred compensation plan, the executive defers a portion of their income, which is often 澳洲幸运5开奖号码历史查询:bonus income.

With a salary-continuation plan, the employer funds the future retirement benefit on the executive's behalf. Both plans allow for the earnings to accumulate tax-deferred until retirement, when the 澳洲幸运5开奖号码历史查询:Internal Revenue Service (IRS) will tax the income received as if it were ordinary in🐓come.🌠

Other Plans

Non-Qualified Plan: Executive Bonus Plan 

With an executive bonus plan, a company issues an executive a 澳洲幸运5开奖号码历史查询:life insurance policy with employer-paid premiums as a bonus. Premium payments are considered compensation and are deductible by the employer. The bonus payments are taxable to the exe🌼cutive. In some cases, the employer may pay a bonus over the premium amount to cover the executive’s t𝕴axes.

Non-Qualified Plan: Split-Dollar Plan

A 澳洲幸运5开奖号码历史查询:split-dollar plan is used when an employer wants to provide a key employee with a 澳洲幸运5开奖号码历史查询:permanent life insurance pol⛎icy. Under this arrangement, an employer purchases a﷽ policy on the employee's life, and the employer and the employee divide ownership of the policy.

The employee may be responsible for paying the mortality cost, while the employer pays the balance of the premium. At death, the employee’s 澳洲幸运5开奖号码历史查询:beneficiaries receive the main portion of the 澳洲幸运5开奖号码历史查询:death benefit, while the emp🍸loyer receives a porti🍷on equal to its investment in the plan.

Non-Qualified Plan: Group Carve-Out 

A 澳洲幸运5开奖号码历史查询:group carve-out plan is another life insurance arrangement in which the employer carves out a key employee’s group life insurance over $50,000 and replaces it with an individual policy. This allows the key employee to avoid the imputed income on group life insurance above $50,000. The employer redirects the premium it would have paid on the excess 澳洲幸运5开奖号码历史查询:group life insurance to the individual policy owned by the employee.

The Bottom Line

Often, employers and executives will agree on a set period that the income will be deferred, which could be any🐈where from five years up un🐈til retirement. Ultimately, the deferred income has the ability to grow tax-deferred until it is distributed. These deferral amounts may change from year to year, depending on the agreement between the executive and employer.