What is a nonqualified plan?

A nonqualified plan is a type of employee benefit plan that does not meet the requirements of the Employee Retirement Income Security Act (ERISA) or the Internal Revenue Code (IRC) for qualified plans.

Nonqualified plans are typically offered by employers to high-income or highly-compensated employees who exceed the annual contribution or benefit limits of qualified plans, such as 401(k) plans.

Nonqualified plans can include deferred compensation plans, supplemental executive retirement plans (SERPs), and executive bonus plans.

Unlike qualified plans, nonqualified plans do not offer tax benefits to employers or employees until the funds are distributed. Employers also retain control over the funds, and they are not protected by the federal Pension Benefit Guaranty Corporation.

Nonqualified plans can be seen as a way for employers to provide additional compensation to top-performing employees, while also retaining talent and promoting loyalty. However, they also have fewer legal protections for participants, and may be subject to change at the discretion of the employer.