In: Finance
"Sponsoring Employee Compensation Plans" Imagine that you are an employer trying to decide whether to sponsor a “qualified” retirement plan or “nonqualified” deferred compensation plan for your employees. What are the tax and nontax consequences of each plan? Based on what you know about the different plans, what would be your justification for selecting the one you choose?
Qualified and nonqualified deferred compensation plans are for employee benefits in small business. But there are different set of rules for a qualified plan and nonqualified plan.
Differences
Qualified deferred compensation plans are also governed by the Employee Retirement Income Security Act (ERISA). ERISA issues specific rules for participating in qualified plans. Nonqualified deferred compensation plans are not governed by ERISA, and they have more flexible rules.
Qualified deferred compensation plans have a limit. There is no limit for non-qualified deferred compensation plans. Employees can defer compensation as much they like.
Qualified plans are subject to FICA tax at the time of deferral. Nonqualified plans are also subject to FICA tax, and if the employee is required to perform substantial future services to receive their future payment, FICA tax is not owed until the employee has performed all the services
Business can deduct qualified deferred compensation contributions (from you and your employee) at the time of deferral for availing tax deductions. But the contributions for nonqualified plans until the employee actually receives the funds are not deductible.
From both of these plans, Qualified deferred compensation plans are recommended because, the compensation contributions are tax deductible and it has specific rules.