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Nonqualified Plans
In the past, Congress has passed numerous laws restricting the benefits that can be provided to highly compensated employees in a qualified retirement plan so employers must look to other strategies to provide executive employees with an adequate level of benefits. Nonqualified deferred compensation plans are a way to provide an appropriate level of retirement income to their highly compensated group. There are no restrictions on the amount of benefits that may be offered in a nonqualified plan. Furthermore, there are no reporting requirements.A nonqualified deferred compensation plan is one that is not recognized by the IRS as eligible for tax-deferred or tax-deductible advantages.
Q: What is the major purpose of a nonqualified plan?
A: To provide supplemental or additional benefits to executives or highly paid employees.
Disadvantages
Nonqualified plans have definite disadvantages:
| Employer | Employee |
|---|---|
| The tax deduction can only be made when the employee receives the benefit. This may take many years. | The benefit is not secured. The plan is an unsecured promise on the employer’s part. In the event of bankruptcy, the employee’s claim would be like that of a creditor. |
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Nonqualified plans: