Nonqualified Plans

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Nonqualified plans are designed to meet the special retirement needs of key executives. Plans can be offered in addition to 401(k) and other qualified plans, allowing key executives to increase their retirement savings. Plans offer some tax advantages.

  • Available to only a select group of highly-compensated employees
  • Tax-favored contributions
  • No limitation on benefit amount

Nonqualified plans allow employers to recruit and retain the most talented executives. While nonqualified plans are eligible for some of the tax advantages offered by qualified plans, they offer plan sponsors more flexibility:

  • Covers only a select group of highly compensated employees
  • Not subject to nondiscrimination rules
  • Unlimited tax-deductible contributions
  • Virtually no government paperwork
  • Helps ensure executive retention

Note: Deduction on the contribution is taken the year the income becomes taxable to the employee.

Nonqualified plans allow executives to accumulate a larger asset base for retirement than traditional plans because these plans are not subject to annual contributions limits. Employees are able to defer taxation until retirement when they are likely in a lower tax bracket. Tax advantages include:

  • No taxation on employer contributions until distributions are taken
  • Deferred taxation on earnings

Note: Benefit is not secured. Employee must rely on the employer's promise to pay the deferred compensation in the future.

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