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Non-Qualified Plan


A Non-Qualified Plan refers to a type of employer-sponsored retirement savings program that does not meet the IRS guidelines for a tax-advantaged pension plan. With this plan, contributions are usually non-deductible for employers and taxable to the employee on distribution. It allows employers greater flexibility but fewer tax benefits, compared to a qualified plan.


The phonetics for the keyword “Non-Qualified Plan” is “nɑn-kwɑ-lɪ-faɪd plæn”.

Key Takeaways

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  1. Non-Qualified Plans are not subject to the same rules as qualified plans: One of the key characteristics of non-qualified plans is that they do not follow the stringent rules of the Employee Retirement Income Security Act (ERISA). Consequently, they offer more flexibility in terms of how they can be designed and who they can be offered to.
  2. Non-Qualified Plans offer significant tax advantages: These plans offer beneficial tax treatment to the employer and the employee. The employer can take a tax deduction once the employee recognizes the income. Employees, on the other hand, can defer taxation until they receive income from the plan.
  3. Non-Qualified Plans are effective tools for recruitment and retention: Given their flexibility and tax benefits, non-qualified plans are commonly used to attract and retain key employees. They can be tailored to meet the specific needs of these employees, making them an attractive incentive.

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A Non-Qualified Plan is important in business/finance as it provides a method of supplementing existing qualified plans, offering flexible retirement income options without being subject to the same restrictive rules of qualified plans. Tax benefits associated with non-qualified plans often make them attractive to businesses. Non-qualified plans allow employers to selectively provide certain employees with benefits without obligating them to offer the same benefits to all employees, which is a requirement in qualified plans. Additionally, the funds in a non-qualified plan are often available for early withdrawal, making them a valuable resource for employees in case of a financial emergency. Thus, non-qualified plans prove quite crucial in managing benefits and retirement planning strategy in businesses and for employees.


The purpose of a non-qualified plan is primarily to meet the specific needs of key executives and employees of a company that aren’t covered by standard retirement plans. These plans are geared towards attracting, retaining, and rewarding high-wage earners by offering them a contractual promise of deferred compensation, additional retirement income, or other specified benefits. Non-qualified plans usually offer flexibility and a tax-efficient method of saving for retirement beyond the limits imposed on qualified plans like 401(k)s, IRAs, etc. They are an essential component of an executive’s compensation package, meant to provide advantages that regular retirement plans cannot.Non-Qualified Plans are used for providing targeted benefits to selected employees. Businesses may use them to provide supplemental retirement benefits, death benefits, or other deferred compensation to key employees or executives. Non-qualified plans are often tied to performance milestones or tenure, acting as powerful incentives for these persons to meet certain goals or remain with the company for an extended period of time. Consequently, they serve as an exceptional motivational tool for a company’s top talent. While their benefits are many, it’s also important to note that unlike qualified plans, non-qualified plans do not provide the employers with a tax deduction, nor do they provide the participant with tax deferral. The employee pays taxes on the funds when they are dispensed, which is often upon retirement when the employee’s income is typically lower.


1. Deferred Compensation Plans: A commonly used non-qualified plan in the corporate world is a deferred compensation plan. This allows an employee to defer receiving part of their income until a later date (usually retirement), which also defers the tax on this income. This kind of plan is particularly beneficial for high earners who expect to be in a lower tax bracket after retirement.2. Executive Bonus Plans: In an executive bonus plan, companies provide key executives with additional bonuses which are taxable as income, but allow for the company to derive a current tax deduction. It can serve as an added incentive to retain top talent in the company. 3. Split-Dollar Life Insurance: This is a plan where premiums, cash values, and death benefits of a life insurance policy are split between an employer and an employee, or between an individual and a non-corporate third party. The employers often pay the premiums and recover their costs from the policy’s cash value or death benefit. This type of plan often provides a death benefit to the employee’s beneficiaries and a potential cash value build-up that the employee could use during retirement.

Frequently Asked Questions(FAQ)

What is a Non-Qualified Plan?

A Non-Qualified Plan is a type of retirement savings contribution plan that falls outside of employee retirement income security act guidelines. Unlike qualified plans, these plans allow employers a larger capacity of discrimination and flexibility on offering benefits towards highly-compensated employees.

How do Non-Qualified Plans differ from Qualified Plans?

Unlike Qualified Plans, Non-Qualified Plans are not subject to the same Internal Revenue Service regulations and do not have the same tax advantages. They tend to favor key employees and offer greater flexibility and less regulation.

Who can benefit from a Non-Qualified Plan?

Non-Qualified Plans are typically most beneficial to key executives and other highly compensated employees. These employees may already max out their contributions to qualified plans and require additional ways to save for retirement.

Are contributions to Non-Qualified Plan tax-deductible?

No, contributions to Non-Qualified Plans are not tax-deductible. The employer can only deduct expenses when income is recognized by the employee.

What types of Non-Qualified Plans exist?

Common types of Non-Qualified Plans include Deferred Compensation Plans, Executive Bonus Plans, and Split Dollar Life Insurance Plans.

Are there any limitations for Non-Qualified Plans?

Non-Qualified Plans do not have contribution limits, and they are not subject to most of the constraints and regulations of the Employee Retirement Income Security Act (ERISA).

When is income tax paid on Non-Qualified Plans?

Unlike Qualified Plans, where taxes are usually paid upon withdrawal, Non-Qualified Plans are generally taxed when the funds are vested. Vesting refers to the point when the employee gains control over their benefit or contribution.

What are the downsides of a Non-Qualified Plan?

The downsides include a lack of tax incentives and the fact that the plans may favor highly compensated employees, which can lead to inequity in the workplace. Furthermore, Non-Qualified Plans are not protected from company creditors.

Can Non-Qualified Plans be rolled over into an IRA or another plan?

No, Non-Qualified Plan distributions cannot be rolled over into an IRA or a qualified plan. This is a significant difference between non-qualified and qualified plans.

Are Non-Qualified Plans protected from bankruptcy?

Non-Qualified Plans are not protected in the event of bankruptcy because these assets are not kept separate from the company’s general assets. They are considered part of the company’s assets and could be claimed by creditors.

Related Finance Terms

  • Deferred Compensation
  • Vesting Schedule
  • Key Employee
  • Distribution Options
  • Top-Heavy Rules

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