Characteristics of Non-Qualified Retirement Plans

There are many ways to save for retirement. More investors are looking for ways to increase the amount of money they can save because they do not want to have to rely on Social Security. While many people max out employer retirement plans such as pensions, 401(k)s and Simple IRAs along with personal IRA programs, there are other options available to add to retirement savings. These are categorized as non-qualified retirement plans.

Defintion

A non-qualified retirement plan is an arrangement, whether formal or not, made between an employer and employee. It allows the employee to defer compensation in a retirement plan that does not meet the IRS 401(a) definition of qualified. They are sometimes referred to as phantom stock plans though they are not stock arrangements. The employer maintains the plan on behalf of the employee until retirement or the employee leaves the company.

Types

Non-qualified retirement plans fall into four main categories: Salary Reduction Arrangements, Bonus Deferral Plans, Top-Hat Plans and Excess Benefit Plans. Salary Reduction Arrangements allow an employee to have part of his salary deferred. Bonus Deferral Plans allow the employee to take bonuses and defer those. Top-Hat Plans, also known as Supplemental Executive Retirement Plans (SERPs), are designed to allow a highly compensated employee to defer more toward retirement. Excess Benefit Plans give deferring options to the employee who is otherwise limited by employers' qualified plans.

Tax Considerations

Though these are deferred compensation plans, employees are not allowed to reduce their adjusted gross income based on the contributions. This is contrary to other qualified plans that allow employees to get a tax deduction for retirement savings. But the funds do grow tax-deferred and will be taxed when distributions are made upon retirement.

Employer Contributions

While non-qualified plans are maintained by the employer on behalf of the employee, employers are not allowed to make contributions to the account. Unlike qualified plans where employers are either required to or can elect to make contributions or match employee contributions, in non-qualified plans they cannot. All money that goes into the non-qualified plan comes directly from employee earnings.

Withdrawals

Money must be held in the non-qualified plan until the employee either retires or leaves the company. At that point, distributions can be made once the employee is 59½ years or older. If the employee is under age 59½, the money can be transferred into another qualified plan. Non-qualified plans do not allow withdrawals or loans to be made against the money in the plan.