Non-Qualified Plans

Non-qualified deferred compensation plans, are employer-sponsored retirement savings plans that do not meet the Internal Revenue Service (IRS) requirements for qualified plans. These plans are typically offered to highly compensated employees and executives to supplement their retirement savings beyond the limits of qualified plans like 401(k) or pension plans. Unlike qualified plans, which receive favorable tax treatment, non-qualified plans do not offer immediate tax benefits. Instead, they allow employees to defer a portion of their income to be received later, usually during retirement or upon meeting certain conditions specified in the plan. Here are some key features of non-qualified plans: 1. Eligibility: Non-qualified plans are typically offered to select employees, such as executives or highly compensated individuals. They are not available to all employees. 2. Contributions: Employees can contribute a portion of their pre-tax income to the plan, similar to a 401(k) plan. However, there may be limits on the amount that can be contributed. 3. Taxation: Unlike qualified plans, contributions made to non-qualified plans are not tax-deductible for the employee at the time of contribution. Instead, the contributions and any earnings on them are taxed as ordinary income when they are distributed. 4. Vesting: Non-qualified plans may have vesting schedules that determine when employees become entitled to the contributions made by their employer. Vesting schedules can vary depending on the terms of the plan. 5. Distribution: Non-qualified plan distributions can occur upon retirement, termination of employment, disability, death, or other specified events outlined in the plan. When distributions are made, they are subject to ordinary income tax. 6. Employer Contributions: Employers may also contribute to non-qualified plans on behalf of eligible employees. These contributions are typically subject to vesting schedules and may be tied to performance or other criteria.