Differences Between Qualified & Nonqualified Plans

If there is a wide pay gap between your upper management personnel and your rank and file employees, you may consider offering both a qualified retirement plan, such as a 401(k) or SIMPLE IRA, and a nonqualified plan. This way you can provide more tax-deferral and long-term savings flexibility to your highly compensated employees without being restricted by IRS limits.
 
Here are the main differences between qualified and nonqualified plans:
Plan Feature Qualified Plan Nonqualified Plan
Eligibility Must be available equally to all employees as defined by the plan Can be made available only to select employees
Compensation deferral limits Yes; total dollar limits are adjusted each year by the IRS; pre-tax maximum for 2014 is $17,500 No IRS-defined limits
Distribution timing Generally, cannot take distributions before age 59½ except for certain financial hardships Several options available but once a distribution option is elected, it cannot be changed; Section 409A restrictions apply
Mandatory distributions Yes; must take Required Minimum Distributions starting at age 70½ Not required by IRS but plan rules may apply
Assets protected from company creditors Yes No
Loans Yes, if the plan allows No
Participant and company tax deduction on deferrals Yes, in the year of deferral Yes, but not until distribution
Rollover to IRA upon job loss Yes, under terms of the plan No

Game Plan

For a more detailed look at the features, characteristics, and types of qualified and nonqualified plans, go here.
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