What are nonqualified retirement plans?

Nonqualified retirement plans are savings vehicles that are not subject to the rules of the Employee Retirement Income Security Act (ERISA). They do not replace tax-qualified plans like 401(k)s, but they can offer additional employer-sponsored incentives for high-ranking personnel and key executives.

A retired couple enjoying the view of a lake after a hike.

What is a nonqualified retirement plan?

Almost all types of retirement plans share the same goal: to make it easier for everyone to save enough to have a safe and fulfilling retirement. But today, there are numerous options that function in different ways, so it’s easy to get confused. Among others, there are individual retirement plans, like IRAs, and employer-sponsored plans. Most large companies offer tax-qualified retirement plans. They are often 401(k)s, but there are other plans as well.

Nonqualified employer-sponsored plans are normally reserved for the highest paid employees at large companies. They can have value for other companies as well, even small businesses, to help retain important employees.

Provided by an employer for key employees

Usually, nonqualified retirement plans are offered as additional benefits or incentives to a company’s most important employees. They are a way to keep the company’s compensation competitive. Most employees do not receive, nor do they really need, access to nonqualified plans. These plans are more commonly used as executive bonuses than as normal retirement savings plans.

Not subject to ERISA federal laws

The Employee Retirement Income Security Act (ERISA) was established in 1974 to set minimum standards for voluntary retirement and health plans to protect individuals. It’s an important law for protecting most employees, but it does provide some barriers to the ways employers can offer compensation. Nonqualified plans are generally offered on top of qualified plans to provide further bonuses that do not have to follow all these rules.

How are nonqualified retirement plans different from qualified plans?

Qualified plans often offer more tax advantages. They are designed so that all employees can save for retirement more easily. Most large employers already provide qualified plans for their employees. The employees can contribute to a 401(k) or a similar plan, and they often get some matching from their employer to help them save for retirement. However, there are limits to how much they can contribute to most of these plans. Employers might include additional retirement incentives to high-earning employees as a bonus.


What types of nonqualified retirement plans are there?

Since they do not have to follow the same rules, each nonqualified retirement plan can be different. Below are the four main categories, but the details of each plan will usually be negotiated on a case-by-case basis.

Deferred-compensation plan

You can think of deferred-compensation plans as a type of bonus the company pays at a later date. They can help large companies offer better compensation packages, since qualified retirement plans like 401(k)s have contribution limits. They can also help smaller businesses retain talent during slimmer growth years, by promising supplemental income for key employees at a later date.

Executive bonus plan

This is when an employer pays the premium on a life insurance policy for an employee. Usually, it’s set up so the employee gets complete control and can later have access to the policy’s cash value if needed. Or the employee can name a beneficiary and carry it as a normal life insurance policy. The premium payments the company makes are considered compensation for tax purposes.

Split-dollar plan

A split-dollar plan is an agreement between two or more parties to share the ownership, costs, and benefits of the plan, generally funded with a permanent life insurance policy, like whole life. New laws were passed in 2003 that changed the way taxes are treated in these agreements, and that has made them less desirable as part of a compensation package. They are still used, but not as widely as they once were.

Group carve-out

This is yet another type of arrangement using life insurance. Many companies have group life insurance, but it is often capped at a certain amount for every employee. If a company wants to offer a higher life insurance amount to a key executive, it might take that employee out of the group pool and offer him or her an individual policy.


Get help with retirement planning

It doesn’t matter whether you’re an executive, a small-business owner, or a regular employee. You deserve a comfortable retirement. In today’s world, that takes a smart plan. But you don’t have to tackle it on your own. Our agents are knowledgeable on a wide range of products, including annuities, life insurance, and more. They can help you build a well-rounded strategy that can put you on a path toward achieving your retirement dreams and protecting your legacy.


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This article is provided for your general informational purposes only. Neither New York Life Insurance Company nor its agents provide tax, legal, or accounting advice. Please consult your own tax, legal, or accounting professional before making any decisions.