Nonqualified Plans (Deferred Compensation)

Plans outside ERISA's qualified rules, typically for executives.

Retirement Plans, Accounts & Trading Series 65 · Section 3

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.

Nonqualified Plans (Deferred Compensation): a worked example

An executive defers $200,000 of bonus into a nonqualified plan - and loses it when the employer goes bankrupt.

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.

Often confused with Defined Contribution Plan - see Nonqualified Plans (Deferred Compensation) vs Defined Contribution Plan side by side.

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More terms in Retirement Plans, Accounts & Trading

IRA Rollovers vs. Transfers 60-day rollovers are limited to one a year; direct transfers are unlimited. 10% Early Withdrawal Penalty & Exceptions Distributions before 59 1/2 cost 10% extra, unless an exception applies. Solo 401(k) A 401(k) for a self-employed owner with no employees other than a spouse. Defined Benefit Plan A pension promising a specific benefit; the employer bears the investment risk. Defined Contribution Plan An individual account plan whose payout depends on contributions and returns. 403(b) Plan A salary-deferral plan for public schools and 501(c)(3) nonprofits. 457 Plan Deferred compensation for state and local government employees. SIMPLE IRA A low-cost plan for employers with 100 or fewer employees.

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