Nonqualified Plans are employer-sponsored plans designed to benefit a select group of management or key employees. In a properly structured plan, the employer can include those employees it chooses without having to abide by any anti-discrimination, participation, or vesting rules that all Qualified Plans must follow.

Nondiscrimination rules require that Qualified Plans benefit most employees on a generally equal basis. These rules do not apply to Nonqualified Plans. In fact, the participants must be limited to a select group of management or key employees or the plan may become subject to the rules of a governing Qualified Plan. As an owner, you can target benefits to yourself and key employees without making similar contributions for the rest of your work force. This in turn makes Nonqualified Plans more flexible than Qualified Plans. Depending on your company’s circumstances, Nonqualified Plans may effectively meet your specific compensation needs.

Nonqualified plans are often used to make up for qualified benefit shortfalls for the targeted, higher-paid group, without having to provide all employees the same supplemental benefits. You may also establish more than one such plan and provide different plan designs and benefit amounts to different employees. The amount of benefits provided is not subject to specific restrictions. Instead, the amounts, as a part of total compensation, must be generally reasonable. Vesting distributions and other plan provisions need not conform to the usual qualified plan standards.

Key Points:

  • Reversing the “Reverse Discrimination” of Qualified Benefits
  • Recruiting New Executives
  • Rewarding Valuable Executives
  • Retaining Valuable Key Executives
  • Retirement Incentivizing Tool

Common Examples

  • Pre-Tax Compensation Deferral Plan
  • Supplemental Executive Retirement Plan (SERP)
  • Stock Based Compensation Planning

Primary Advantages

  • Legally discriminatory
  • More design flexibility than qualified retirement plans
  • Unlimited participant contributions (pre-tax)
  • Corporate contributions can create a retention “hook”
  • Ability to motivate executives through a performance based company contribution
  • Employee/employer contributions, plus growth, are tax-deductible when paid

Primary Disadvantages

  • Employee deferrals and corporate contributions are not tax deductible until paid
  • Top Hat rules apply to eligibility in an employer/employee relationship
  • Participants are general creditors and subject to a substantial risk of forfeiture