Non-qualified retirement plans are deferred compensation plans that allow the employee to delay receiving earned wages and income until a later date. The employer is charged with the responsibility of maintaining the deferred income in a special fund until the employee retires or otherwise leaves the company. Contributions to a plan are generally not subject to taxes during the calendar year the earnings take place, but are subject to taxes when withdrawn from the plan.
In general, governments do not provide a great deal of guidelines for the exact structure of this type of retirement plan. For example, the Internal Revenue Service in the United States of America focuses on providing specific codes that deal with the establishment and operation of any qualified retirement plan, but do not have comparable rules for non-qualified plans. Instead of specific provisions, employers generally make use of broad tax regulations in structuring a plan.
One key difference is that a non-qualified retirement plan usually does not include any employer contributions. All proceeds come directly from the earned gross income of the employee. From this perspective, the employee enjoys the ability to build funds for retirement without having to pay taxes on the contribution to the plan in the interim. However, any funds withdrawn from the plan in later years will be subject to taxes.
While a non-qualified plan is relatively easy to establish and operate, there are several elements that should be considered when planning for retirement using this model. First, there is usually not the 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 Second, funds cannot be withdrawn or borrowed from the plan at any time.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 maturation dates, or specific events that must take place before payments from the plan can commence. Last, there is no way to secure the balance of a non-qualified retirement plan. This means that creditors of the employee and the employer can petition for access to the funds in the event that outstanding debts are not paid in a timely manner.
