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What Is A Non-Qualified Retirement Plan?

April 30, 2023

Planning for retirement takes effort and the right financial vehicles to plug into as you get ready to save for your Golden Years. You’ve got several options, including mutual funds, a savings account, and specialized retirement savings accounts. 

Two things to consider when setting up your retirement are qualified vs. non-qualified retirement plans. Non-qualified plans are employer-sponsored and tax-deferred. Unlike qualified plans, these non-qualified retirement plans fall outside the auspices of the Employee Retirement Income Security Act (ERISA). 

The financial advisors will discuss non-qualified retirement plans, what they are, and who they’re designed for.

What Is a Non-Qualified Retirement Plan?

Non-qualified retirement plans are designed for higher-paying employees, such as executives, and allow for larger sums of money to be put into retirement savings beyond the limits in place with a 401(k) plan.

The biggest difference between a qualified vs. non-qualified retirement plan is the testing required with qualified plans. Testing for qualified plans means they must pass rigorous non-discrimination regulations to ensure they can maintain their status with a tax advantage. Qualified plans allow employees to put their own pay and some money from the employer into a retirement fund. These qualified plans are available to all employees if they so choose.

What Are the Types of Non-Qualified Retirement Plans?

There are five main types of non-qualified retirement plans. They are generally used to help recruit executives and upper-level employees because of the financial benefits.

Deferred Compensation Plans

With deferred compensation, an employee can earn wages one year but receive them in another year (like during retirement). A pension, wraparound 401(k), bonuses, severance pay, and excess benefits are examples of deferred compensation. Since the employee doesn’t receive the money until later, they don’t have to pay income taxes on it in the year when they work. You might see this plan called a 457(b) plan or a 457(f) plan.

Salary Continuation Plan

Just as it sounds, salary continuation means an employer continues paying the employee even during retirement. The rate is set beforehand and usually at a reduced pay rate from when the person worked for the company.

Executive Bonus Plan

These are deductible business expenses for employers that serve as a life insurance policy. The employer pays for the premiums of the life insurance while listing them as bonus compensation on an expense sheet and tax return.

Split-Dollar Life Insurance Plan

This plan lets an employer split the costs of a permanent life insurance policy with an employee, which can increase the value of the life insurance payout. Details of this plan can differ based on the specific situation and contract.

Group Carve-Out Plan

For higher-paying employees, a group carve-out plan replaces the amount of a group life insurance policy with an individual life insurance policy to avoid higher costs.

Advantages of Non-Qualified Retirement Plans

Your company gets two main advantages of using a non-qualified retirement plan as a benefit. First, it can set you apart from other companies offering benefits to experienced executives. Second, it gives you tax benefits as deductible employee expenses. They’ll help your best employees preserve their wealth and set them up for retirement after they stop working.

Our Business Advisors Can Help You Pick a Non-Qualified Retirement Plan

Ready to start offering your best employees a non-qualified retirement plan as a benefit? Contact us for more information. We’ll help you navigate the financial aspects of this retirement plan.