Non-qualified retirement plans allow employees to delay receipt of wages until a later date, with contributions generally untaxed until withdrawal. Employers use broad tax regulations to structure plans, which generally do not include employer contributions. However, there are limitations, including no retroactive application, no ability to withdraw or borrow from the plan, and no insurance for the plan balance.
Non-qualified retirement plans are deferred compensation plans that allow an employee to delay receipt of wages and earned income until a later date. The employer is responsible for keeping deferred income in a special fund until the employee retires or leaves the company. Contributions to a plan are generally not taxed during the calendar year in which the earnings are produced, but are taxable when withdrawn from the plan.
In general, governments do not provide a great deal of guidance for the exact structure of this type of retirement plan. For example, the US Internal Revenue Service focuses on providing specific codes that address the establishment and operation of any qualified retirement plan, but does not have comparable rules for non-qualified plans. Rather than specific provisions, employers generally make use of broad tax regulations to structure a plan.
One key difference is that a nonqualified retirement plan generally does not include any employer contributions. All income comes directly from the employee’s earned gross income. From this perspective, the employee enjoys the ability to generate retirement funds without having to pay taxes on the plan contribution in the interim. However, any funds withdrawn from the plan in subsequent years will be taxable.
Although a non-qualified plan is relatively easy to set up and operate, there are several elements that should be considered when planning for retirement using this model. First, there is usually no ability to make this type of plan retroactive. That is, the retirement plan must be in place and applied only to current income withholding. Second, funds cannot be withdrawn or borrowed from the plan at any time. Most examples have specific expiration dates or specific events that must take place before plan payments can begin. Lastly, there is no way to insure the balance of a non-qualified retirement plan. This means that the employee’s creditors and the employer can request access to the funds in the event that outstanding debts are not paid in a timely manner.
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