Nonqualified Plans (Deferred Compensation) vs Defined Contribution Plan
Plans outside ERISA's qualified rules, typically for executives. An individual account plan whose payout depends on contributions and returns.
What is the difference between Nonqualified Plans (Deferred Compensation) and Defined Contribution Plan?
Qualified plans: nondiscriminatory, IRS-approved, employer deducts when contributed, assets protected in trust. Nonqualified: can favor executives, deduction when paid, assets at risk.
| Nonqualified Plans (Deferred Compensation) | Defined Contribution Plan | |
|---|---|---|
| In one line | Plans outside ERISA's qualified rules, typically for executives. | An individual account plan whose payout depends on contributions and returns. |
| Example | An executive defers $200,000 of bonus into a nonqualified plan - and loses it when the employer goes bankrupt. | Two employees contributing identically can retire with very different balances depending on their fund choices. |
| Unit | Retirement Plans, Accounts & Trading | Retirement Plans, Accounts & Trading |
| Series 65 | Section 3: Client Strategies | Section 3: Client Strategies |
What is Nonqualified Plans (Deferred Compensation)?
Can discriminate in favor of key employees and need no IRS approval. The employer's deduction comes only when benefits are paid. Deferred compensation is generally an unsecured promise, so participants are general creditors if the company fails. Contributions to qualified plans, by contrast, are deductible when made and protected in a trust.
What is Defined Contribution Plan?
401(k), 403(b), profit-sharing, and money purchase plans. Each participant has an account; the eventual benefit is whatever it grows to, so the employee bears the investment risk. Contributions may be vested immediately or on a schedule.