Question

Taxation of Executive Compensation

What are qualified plans and non-qualified plans and explain the major differences between these two types?

Answer 1

Qualified plans, such as IRAs, 401(k) plans, and profit-sharing plans, are required to meet the standards of the Employee Retirement Income Security Act (ERISA). On contrary, non-qualified plans are supplemental gains on top of those provided by a firm's qualified retirement plans. However these are not needed to meet ERISA standards in regard to the eligibility, documentation, participation, and vesting.

The major differences between these two types are:

-- Qualified deferred compensation plans are governed by the ERISA; conversely the nonqualified deferred compensation plans are not governed by ERISA, they they provide more flexible rules and fewer protections for the employees

-- Qualified and nonqualified retirement plans differ on the contribution limits. The qualified deferred compensation plans have a limit. For instance, in the year 2018 employees are allowed defer up to $18,500 to their traditional 401(k) plan. Nonqualified deferred compensation plans does not holds any limit.

--Qualified plans are secure while nonqualified retirement plans have security risk.

--Qualified plans should be beneficial to all employees equally, with no differentiation among the compensation levels. On contrary the non-qualified plans do not have the similar restrictions on it and is allowed to set up different benefit structures for various positions

--Another difference among these two is in regard to employee participation. Qualified plans are subject to yearly contribution limits fixed by the IRS each year. However the contributions to non-qualified plans are unlimited.

--The qualified plans contributions must be reported, however there are no significant filing requirements or reporting for nonqualified plans