Qualified plans, such as 401(k) plans, IRAs and profit-sharing plans, must meet the standards of the Employee Retirement Income Security Act (ERISA). Non-qualified plans are supplemental benefits on top of those provided by a company's qualified retirement plans. They are not required to meet ERISA standards regarding eligibility, participation, documentation and vesting. Non-qualified plans are often used as an added incentive for executives and other highly compensated employees.
Tax Treatment and Benefits
Tax treatment is the main difference between qualified and non-qualified retirement plans. Contributions to a non-qualified plan are not deductible to the employer until the employee takes a withdrawal and is taxed on the income. Employer contributions to a qualified plan may be deducted immediately. The employee may also defer taxes on the salary he contributes to a qualified plan. Interest, dividends or capital gains are taxed as ordinary income when the employee withdraws money from the plan.
Plan Contribution Limits
Qualified plans are subject to annual contribution limits set by the IRS each year. For 2019, the cap on IRA contributions is $6,000 for individuals under age 50 and $7,000 for those over 50. 401(k), 403(b) and 457 plan deferrals are limited to $19,000 for the year. Contributions in excess of these amounts are not deductible and may subject the employee to excise taxes. In contrast, contributions to non-qualified plans are unlimited.
Plan Eligibility Requirements
Non-qualified plans offer more flexible in their eligibility rules. Qualified plans must be open to all employees over a specified age and service requirement, usually 21 years old and one year of service. Non-qualified plans may be restricted to a small group of employees or even a single executive as a bonus plan.
Participation in the Plan
Qualified plans must benefit all employees equally, with no differentiation between compensation levels. Highly paid executives cannot defer a significantly higher percentage of their salary than lower-paid workers. Non-qualified plans do not have the same restrictions on participation. Your company may set up different benefit structures for different positions or departments, regardless of compensation level.
Reporting to the IRS
Non-qualified retirement plans require minimal reporting, saving you time and money on paperwork preparation. You are only required to file a short form with the U.S. Department of Labor. A qualified plan must file Form 5500 with the IRS each year. The plan sponsor must also distribute a Summary Annual Report to all participants and beneficiaries two months after the IRS filing deadline. This report shows the plan's financial activity for the previous year.
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