A retirement savings plan is "qualified"—that is, eligible for governmental regulation and certain tax breaks—if meets the guidelines set by the Employee Retirement Income Security Act (ERISA). A non-qualified plan, simply put, does not.

Qualified vs. Nonqualified✱ Retirement Plans: An Overv🐭iew

Qualified plans include 401(k) plans, 澳洲幸运5官方开奖结果体彩网:403(b) plans, profit-sharing plans, and 澳洲幸运5官方开奖结果体彩网:Keogh (HR-10) plans.

Nonqualified plans include 澳洲幸运5官方开奖结果体彩网:deferred-compensation plans, executive bonus plans, and 澳洲幸运5官方开奖结果体彩网:split-dollar life insurance plans.

澳洲幸运5官方开奖结果体彩网:Individual 🐼retirement accounts (IRA🐠s) are not qualified plans because they are not set up by an employer and therefore don't fall under ERISA rules. They do, however, have special tax breaks for savers.

What Is a Qualified Retirement Plan?

Qualified retirement plans, such as the 401(k), are "qualified" for special tax treatment because they meet the requirements of ERISA.

A plan must meet several criteria to be considered qualified, including:

• Disclosure—Documents about the plan’s framework and investments must be available to participants upon request.
• Coverage—A specified portion of employees, but not all, must be covered.
• Participation—Employees who meet eligibility requirements must be permitted to participate.
• Vesting—After a specified length of employment, a participant’s right to the accumulated money is a nonforfeitable benefit.
• Nondiscrimination—Benefits must be proportionately equal in assignment to all participants to prevent excessive weighting in favor of higher-paid employees.

The employer may or may not 澳洲幸运5官方开奖结果体彩网:contribute a matching amount for the employee.

Defined Contribution vs. Defined Benefit

🌠 A💧 qualified plan may have either a defined contribution or a defined benefit structure.

• In a defined contribution plan, the employee manages the investment, and the total accumulated is theirs when they retire.
• In a defined-benefit plan, the employer manages the money and guarantees that the employee will receive a fixed payment in retirement. This is the increasingly rare traditional 澳洲幸运5官方开奖结果体彩网:pension plan.

In either case, plan sponsors must meet ERISA guidelines regarding participation, vesting, benefit accrual, fundinꦍg, and plan informati🐽on disclosure.

What Is a Nonqualified Retirement Plan?

Nonqualified retirement plans are usually offered as an additional incentive for executives and other 澳洲幸运5官方开奖结果体彩网:highly-compensated employees. The plans are usually part of a benefits package.

Nonqualified plans are not eligible for 澳洲幸运5官方开奖结果体彩网:tax-advantaged benefits under ERISA. The contributions to nonqualified plans𓃲 are taxed when the money is paid.

Qualified vs. Nonqualified: Key Differences

Qualif🎀ied plans must be made available to all company employees. Nonqualified plans are offered only to some employees as a bonus.

The other main difference is in the tax treatment. Qualified plans offer tax benefits to both the employee and the employer. The employee either defers taxes (with a traditionꦏal plan) or pays them upfront in order to withdraw them tax-free in reti🐓rement (with a Roth plan), while the employer can deduct any contributions it makes. Nonqualified plans do not have these tax advantages.

Nonqualified plans are often designed to meet the specific needs of the few employees who receive them. Qualified plans cannot be customizeꩵd.

The Bottom Line

Most employees are now familiar with the qualified retirement savings plan, whether or not they know it by that name. The 401(k) plan and its many variations like the 403(b) are employer-sponsored, long-term savings plans that offer sp🔜ecial tax advantages to participants. They also have to follow certain federal rules put in place to guarantee access to the plans and transparency in their management.

Nonqualified plans are less well known. They are bonus savings plans offered only to executives and other highly-compe♐nsated employees as part of a larger incentives package. They do not come with tax breaks.