Non-Qualified Retirement Plans

   A non-qualified employee benefit plan does not have the federal tax advantages of a qualified pension plan, in which employers receive a federal tax deduction for contributions paid into the plan on behalf of their employees. For an employer, not having a tax deduction can be a serious disadvantage, but a nonqualified plan has these advantages: otherwise discriminatory coverage for some employees is allowed and benefits can be allocated to certain employees whom the employer wishes to reward. The result could be that the total cost of the benefits for a particular group of employees may be less under a nonqualified plan than for all employees under a qualified plan.

There are four major types of non-qualified plans:

• Deferred compensation plans
• Executive bonus plans
• Group carve-out plans
• Split-dollar life insurance plans*

The contributions made to these plans are usually nondeductible to the employer, and are usually taxable to the employee as well. However, they allow employees to defer taxes until retirement, when they are presumably in a lower tax bracket. Non-qualified plans are often used to provide specialized forms of compensation to key executives or employees in lieu of making them partners or part owners in the company or corporation.

*Split-Dollar Insurance is not an insurance policy; it is a method of paying for insurance coverage. A split-dollar plan is an arrangement between two parties that involves "splitting" the premium payments, cash values, ownership of the policy, and death benefits.  Splitdollar arrangements are subject to IRS Notice 2002-8 and Proposed Regulations that apply for purposes of federal income, employment and gift taxes.