A non-qualified pension plan is a savings and investment account you can open with your employer that allows you to earn and save money for your retirement, much like a 401(k) plan. However, unlike a 401(k), most non-qualified plans do not receive special tax treatment from the Internal Revenue Service and are not governed or protected by the 1974 Employee Retirement Income Security Act.
When you participate in a qualified plan, such as a 401(k), the money you put in your plan comes out of your pay before it is taxed. In addition, investments inside your plan are allowed to grow without any tax consequences until you withdraw money from the plan. By contrast, you have to pay tax on money you or your employer contribute to your non-qualified plan during the year you contribute it and capital gains earned inside the plan are not tax-deferred, meaning you have to pay tax on them during the year you earned a capital gain.
No Bankruptcy Protections
Because non-qualified pension plans are not governed by ERISA rules, they can be more vulnerable to bankruptcy. If you own a qualified plan, such as a 401(k), your money is safe from creditors in the event your employer files for bankruptcy. If you own a non-qualified pension, your employer's creditors can seize some or all of the money in your plan to meet your employer's debt obligations.
457 Plan Exception
A 457 plan is a non-qualified pension plan available to employees of state and local governments, as well as some charitable organizations. While 457 plans are considered non-qualified because they are not governed by ERISA, they receive favorable tax treatment and protections that other types of non-qualified plans do not. If you participate in a 457 plan, the money you contribute reduces your taxable income by the amount of your contribution during the year you contribute. In addition, any investment gains earned inside your plan are not taxed until you begin to withdraw money. When you withdraw money from your 457, it is taxed as regular income based on your tax bracket at the time you make the withdrawals.
Employer Deduction and Deferred Compensation
When your employer matches your contributions to a qualified savings plan, such as a 401(k), it can deduct the amount of money it contributed to your plan when it files its tax returns for the year. Some non-qualified plans are deferred compensation plans, which means your employer agrees to pay you a benefit at some point in the future. In this case, while your employer incurs an obligation to pay you a benefit in the future, it cannot take a tax deduction until you are actually paid a benefit.