America Has Two Retirement Systems

   Many are surprised to learn there are two (2) retirement systems in America: qualified plans and unqualified plans.

   Most are familiar with familiar with qualified plans:

  • 401k plans for private employers,

  • 403(b) and 457 plans for public employees,

  • Profit Sharing Plans, and

  • Defined Benefit plans (i.e., pension plans).

   Each of these plans allow one to make contributions on a pre-tax basis. This means if one earns $100,000 a year and contributes $10,000 to his company's 401k plans, his taxable income for the year is $90,000.

    A qualified plan has statutory limits on contributions and must be made available to all employees.     

Non-Qualified Plans Under Section 409A....

    Most people are not familiar with Non-qualified Plans.  Non-qualified plans are authorized under Section 409A of the IRS Code.  

    Under 409A, Non-Qualified Plans can only be offered to key employees,...i.e, executives, professionals business owners and key employees as defined by the company.  

    The law refers to these employees as 'Top Hat' employees. 

    If one 'Googles' the term non-qualified plans, one will see there are over 15 million hits on non-qualified plans.

    There are three (3) types of Non-Qualified Plans:

  • Supplemental Executive Retirement Plans (SERP),

  • Non-Qualified Deferred Compensation Plans, and

  • Executive Bonus Plans Under Section 162 of the Code.

    The distinguishing characteristic of Non-Qualified Deferred Compensation Plans is the ability to defer an unlimited amount of income on a pre-tax basis and thereby defer taxes on this income to a date that you determine at the time of the deferral decision.

Non-Profit Entitities...

Non-profit entities are also allowed to provide a Non-Qualified Deferred Compensation Plan but these plans must comply with Code Section 457.