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What is a Non-Qualified Retirement Plan?

Malcolm Tatum
Updated May 16, 2024
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Non-qualified retirement plans are deferred compensation plans that allow the employee to delay receiving earned wages and income until a later date. The employer is charged with the responsibility of maintaining the deferred income in a special fund until the employee retires or otherwise leaves the company. Contributions to a plan are generally not subject to taxes during the calendar year the earnings take place, but are subject to taxes when withdrawn from the plan.

In general, governments do not provide a great deal of guidelines for the exact structure of this type of retirement plan. For example, the Internal Revenue Service in the United States of America focuses on providing specific codes that deal with the establishment and operation of any qualified retirement plan, but do not have comparable rules for non-qualified plans. Instead of specific provisions, employers generally make use of broad tax regulations in structuring a plan.

One key difference is that a non-qualified retirement plan usually does not include any employer contributions. All proceeds come directly from the earned gross income of the employee. From this perspective, the employee enjoys the ability to build funds for retirement without having to pay taxes on the contribution to the plan in the interim. However, any funds withdrawn from the plan in later years will be subject to taxes.

While a non-qualified plan is relatively easy to establish and operate, there are several elements that should be considered when planning for retirement using this model. First, there is usually not the ability to make this type of plan retroactive. That is, the retirement plan must be in place and applied only to current income withholding. Second, funds cannot be withdrawn or borrowed from the plan at any time. Most examples have specific maturation dates, or specific events that must take place before payments from the plan can commence. Last, there is no way to secure the balance of a non-qualified retirement plan. This means that creditors of the employee and the employer can petition for access to the funds in the event that outstanding debts are not paid in a timely manner.

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Malcolm Tatum
By Malcolm Tatum
Malcolm Tatum, a former teleconferencing industry professional, followed his passion for trivia, research, and writing to become a full-time freelance writer. He has contributed articles to a variety of print and online publications, including SmartCapitalMind, and his work has also been featured in poetry collections, devotional anthologies, and newspapers. When not writing, Malcolm enjoys collecting vinyl records, following minor league baseball, and cycling.
Discussion Comments
By anon145230 — On Jan 22, 2011

Are both the deferred income and interest earned on the income subject to earned income tax when withdrawn?

By sneakers41 — On Jul 28, 2010

Subway11- I just want to add that many companies also offer a retirement pension plan which provides a guaranteed annuity for life upon retiremnet, if the employee retires with the company after so many years of service.

Companies like UPS and FedEx offer this benefit to their employees. This is a tool that some companies use to retain the services of the employee longer and reduce employee turnover.

By subway11 — On Jul 28, 2010

Latte31- I just want to add that if someone is self employed, there are self employed retirement plans available as well. The SEP IRA, refers to the simple employee pension that allows self-employed individuals the opportunity to save up to 25% of profits or no more than $45,000 a year.

Many small business retirement plans usually offer the 401(k), but the SEP is another option. In that case the account would be controlled by the small business and the employer would also make the contributions as well. The employee who has a SEP in this situation just has to enjoy the free money from the employer.

By latte31 — On Jul 28, 2010

I know that many companies offer the 401(K) retirement plans. This is a tax deferred account that allows employees to contribute pretax dollars into a retirement account.

Most companies even offer a matching contribution from three to six percent of the initial contribution. This plan is also portable, so if you leave an employer you can also take the account with you.

The 401(k) is an employer sponsored retirement plan that allows the employee to choose the investments for a preselected group of securities.

Malcolm Tatum
Malcolm Tatum
Malcolm Tatum, a former teleconferencing industry professional, followed his passion for trivia, research, and writing...
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