Qualified Retirement Plans Vs. Nonqualified Plans
Saving for retirement is becoming increasingly crucial for workers of all ages. Most employers will offer several different retirement plans sorted into two categories: qualified plans, such as 401(k)s, and nonqualified plans, such as company pensions. The differences between them can be complex depending on the plan offered, but there are a few distinct differences that do not change from plan to plan.
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Tax Benefits
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The key difference between a qualified and nonqualified plan is the tax benefits: Nonqualified means the plan is not eligible for favorable tax treatment under the rules of the IRS. This means that any benefits disbursed by a non-qualified plan will be taxed as ordinary income, at ordinary rates. A qualified plan can have taxes deferred until money is withdrawn from the account; and in some cases, taxes can be deferred further under IRS regulations.
Funding
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Qualified plans are usually funded by the employee and the company jointly; the employee will contribute to the plan, and the company will match his or her contribution up to a certain dollar amount. Nonqualified plans are usually funded by the company directly, sometimes deducted from the worker's payroll. Nonqualified plans generally offer the advantage of automatic saving, whereas most 401(k) plans require you to enroll with the company directly.
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Flexibility
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Nonqualified plans offer greater flexibility than qualified plans. With qualified plans, money cannot be deducted before certain requirements are met, or the retiree will face tax penalties. Non-qualified plans can be borrowed from with no tax penalties, depending on the employer, and are treated as ordinary income under IRS rules. Nonqualified plans also offer the option of being switched over to personal qualified plans simply by accepting your pension in a lump sum and placing it in a qualified plan.
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References
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