Student Question:

Hi Dan!

I think I’m confused on my terminology. I always thought non-qualified plans were: SERP’s, Executive Deferred Comp., 457 Plans, etc. But in Lesson 1 of the Retirement Planning section, I see that IRA’s, SEP’s, 403(b)’s are considered “non-qualified plans.”

Am I mixed up about this?

Instructor Response:

Hi Margie!

I hope you’re doing well!! This is a great question. GREAT question. It can be confusing. Clients and planning professionals alike assume that “tax-deferred” is a synonym for “qualified.”

Qualified plans are those employer-sponsored plans fully subject to ERISA. Qualified plans provide the employer with an immediate income tax deduction when contributions are made to the plan AND provide for deferral of income taxes for plan participants within ERISA limits. These plans include the following.

  • Defined Benefit Plan
  • Cash Balance Plan
  • Target Benefit Plan
  • Money Purchase Plan
  • Profit Sharing Plan
  • 401(k) Plan
  • Stock Bonus Plan
  • ESOP

Non-qualified Plans provide powerful income tax deferral to participants and generally allow employers to deduct plan contributions when the contribution is made. These plans are not generally subject to ERISA but the amount that may be contributed and deducted is limited by statute. Non-qualified plans include the following.

  • Traditional IRAs (may be sponsored by an employer or established by an individual)
  • Roth IRAs (generally only established by an indvidual)
  • SEP IRAs
  • 403(b)s

Non-Qualified Deferred Compensation (NQDC) is just that, merely the deferral of compensation. Some texts and authors refer to these plans simply as “deferred compensation.” These plans are generally NOT limited (exceptions apply) and employers may contribute more than the ERISA limits to NQDC plans. These plans do NOT allow employers to take an income tax deduction when the the plan is funded. Employers receive an income tax deduction only when the participant recognizes income. Properly structured NQDC plans provide the participant with deferral of income taxes. NQDC includes the following.

  • Salary Reduction Plans
  • Death Benefit Only Plans
  • Excess Benefit Plans
  • Supplemental Executive Retirement Plans
  • 457(b) Plans
  • Non-Qualified Stock Options
  • Incentive Stock Options
  • Restricted Stock Plans

I hope this helps clear up the issue. Please let me know if not.

Talk to you soon!