What is the Difference Between Qualified and Non-Qualified Pension Plans?

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In short, qualified pension plans are the most common type of retirement plan and are given more preferential treatment in the tax code. Non-qualified plans, on the other hand, have much less stringent requirements and consequently less favorable tax treatment. In contrast to qualified plans, which must be available company-wide, the less popular, non-qualified plans are more typically used as compensation for executives. When going through the division of assets in a divorce, non-qualified pension plans are typically easier and simpler to divide at the time of the divorce proceedings.

Non-Qualified Pensions
Non-qualified plans, on the other hand, do not meet the ERISA requirements. For this reason, non-qualified funds offer more flexibility for employers but also limit the tax benefits.
Here is a list of popular non-qualified funds:
●       Certificates of Deposits
●       Annuities
●       Mutual Funds
●       Money Markets
●       Savings
In comparison to qualified funds where the employer can immediately deduct any contribution to the pension or retirement fund, employers may not deduct any contributions to a non-qualified plan until the contribution is distributed to the employee. In addition to the difference on contribution limits, qualified and non-qualified plans also differ on their eligibility, participation, and reporting requirements.
●       Eligibility. Under ERISA, a qualified plan must be available to all employees over a certain age. Typically, employers must make the retirement plan available to all employees over 21 that have worked at the business for at least one year. Non-qualified plans, on the other hand, can be offered to a small group of employees, or even just a single employee.
●       Participation. Qualified plans are required to offer the same level of benefits to all employees, regardless of compensation. There is no similar requirement for unqualified plans, which can offer different benefit levels to employees depending on their compensation, department, or position.  
●       Reporting Requirements. ERISA imposes strict reporting requirements for any qualified plan. Every year, the employer must file with the IRS and distribute an annual report to all participants that summarizes the fund’s performance in the previous year. The reporting requirements for unqualified plans are simpler; employers only need to file a single form with the U.S. Department of Labor. 

For these reasons, non-qualified plans offer much more flexibility for employers in exchange for less favorable tax treatment. Consequently, unlike the more-popular qualified plans, non-qualified retirement plans and pension funds serve a more limited function. In practice, non-qualified funds are typically used as a method of “deferred compensation” for high-level business executives. Because non-qualified plans lack the preferential tax treatment of qualified plans, these plans are typically easier to divide at the time of divorce.

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