What is a non-qualified retirement plan?

As an owner of a closely held business, you could already offer (and participate in) a qualified retirement plan such as a SEP, Simple or 401(k). While they offer significant tax advantages, there are rules around contribution limits, minimum distributions, early withdrawals, and minimum vesting amounts. A non-qualified retirement plan, however, doesn't have those limitations, can be tailored to the individual, and can help key employees build a nest egg much faster.

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Types of non-qualified retirement plans

Retirement accounts like a 401(k) and IRA are well known, but when it comes to non-qualified retirement plans, not so much. Here are several common ones:

Elective Deferred Compensation Plan

This plan allows a key employee to take a portion of their yearly wages and defer it to sometime down the road, most often during retirement.

Supplemental Executive Retirement Plan (SERP)

The employer or business owner agrees to set aside additional compensation for a key employee and promises to pay it later, typically when they leave the company or retire.

Phantom Stock Plan

This cash benefit is a performance-based arrangement that pays a key employee either the value of a specified number of company stock shares or the growth in the value of the stock.

Other selective executive non-qualified plans:

Executive Bonus Plan

This lets an employer or business owner take out, and pay for, a permanent life insurance policy for a key employee. The policy's cash value grows tax deferred and can be used as extra retirement income.

Split Dollar Plan

Created by an employer and a key employee, both parties agree to share the ownership, costs, cash value, and death benefit of a permanent life insurance policy, like whole life.

Disability Wage Continuation plan

This benefit is designed to replace part or all of a key employee's income (while using the tax code to their advantage) if they're not able to work due to sickness or injury.

Benefits of non-qualified retirement plans

See the top ways that Elective Deferred Compensation Plans, SERP Plans, and Phantom Stock Plans can help business owners and key employees.

Reward key contributors

Employers can choose which employees can participate in non-qualified retirement plans so they can be a great way to attract and retain executive level employees.

Save more for retirement

Since traditional retirement plans like a 401(k) have contribution limits, employers can help key employees save more of their income now to help meet their income needs in retirement.

Reduce taxable income

Because compensation is deferred, you can draw on the funds when you're in a lower tax bracket, typically once you retire.

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