What Are Non-qualified Plans (W-2)?

The non-qualified plan is a type of retirement savings plan that is sponsored by an employer and tax-deferred. 

It meets specialized needs for certain employees and plays a big role in retaining and recruiting employees. 

They are called non-qualified because they are not part of the Employee Retirement Income Security Act (ERISA) guidelines and are exempted from the testing required for certain qualified retirement savings plans. 

Types of Non-qualified Plans

The type of non-qualified plans include:

Deferred-Compensation Plan

In this plan, an employee earns wages in one year but receives them in another mostly during retirement. Deferred compensation includes retirement, pension, and stock option plans. 

They also include excess benefits, bonuses, and severance pay plans. 

Salary-Continuation Plan

Under this plan, an employee, mostly an executive, continues to receive a salary even during the retirement period from the employer. However, the rate at which an employer will pay maybe less.  

Executive Bonus Plan

The employer provides supplemental benefits to some employees and executives. These benefits are counted as deductible business expenses for the employer. 

Split-Dollar Life Insurance Plan

This plan allows the sharing of premium costs, cash value, and tax/legal benefits of a permanent life insurance plan between an employer and an employee. 

Group Carve-Out Plan

This plan replaces part of an employee’s group life insurance policy with an individual one to prevent excess costs. 

Eligibility for Non-qualified Plans

Non-qualified plans are mostly developed for key executives and certain high-earning employees. This is because this type of plan acts as an incentive for such employees to stay with the organization. 

One exception includes the deferred compensation plan which some seasonal workers including teachers will fall under. Teachers, instead of deferring part of their income into the retirement plan, defer part of their income for the entire school year to the summer period. This is so that they can continue to receive some money when they are not working. 

Non-qualified plans also apply to high-earning independent contractors. By deferring some of their salaries into their retirement plan, the employer benefits from not paying the entire salary immediately. 

Benefits of Non-qualified Plans to an Employer

There are several benefits that an employer enjoys from non-qualified plans:

  • Offers flexibility that is not offered under other plans such as ERISA. Employers have the option of giving these benefits to only those employees who will benefit the most out of them. 
  • A great way of retaining and engaging employees for long periods of time. 
  • Improves cash flow since part of the income is deferred to the future.
  • The setup and administration are very less with no special annual costs.