When setting up your company’s retirement plan options you want to make sure all your employees benefit and that your company sees some tax benefits. Choosing between qualified vs non-qualified retirement plans or a mix of the two can help all your employees and your company benefit. What are the differences between these options though? Which one is right for your business, and can you offer both? Let’s find out.
Qualified Retirement Plans
A qualified retirement plan has been designed to meet the requirements of ERISA. These requirements include vesting schedules, nondiscrimination practices and testing, employee plan notices, and distribution rules.
Advantages
Qualified retirement plans give employers and employees tax benefits on the pre-tax contributions they make. Most standard defined benefit and defined contribution plans fall under qualified retirement plans. This includes 401(k) plans, 403(b) plans, and Cash Balance plans. These plans are protected from creditors under ERISA, which ensures the assets cannot be taken if the company is not financially sound.
Disadvantages
The compliance requirements for these plans can be time-consuming and expensive for the employer. Employees and employers are limited in how much they can contribute to their plans each year. Employees who are highly compensated may not be able to save enough each year to retire with the same lifestyle they are living currently because of these contribution limits.
Non-Qualified Retirement Plans
Non-qualified retirement plans do not have the same compliance requirements as qualified plans. Generally, these plans are only offered to executives or high earners. Non-qualified plans allow these employees to retire with a similar lifestyle to what they are currently living.
Advantages
Employees can still make tax-deferred contributions depending on the way the plan is set up. Unlike qualified plans that can’t exceed the contribution limits set by the IRS, non-qualified plans have no maximum contribution limit. This makes them ideal for highly compensated employees that would normally max out their contributions each year. Employers can save time and money by not having to file nondiscrimination testing and plan notices.
Disadvantages
These types of plans do not have tax benefits for employers. Employees who are not highly compensated may not be offered these plans or the plan may not be as beneficial as a qualified plan. These plans are not protected from creditors which leaves the assets at risk if the company is not financially sound.
Qualified vs Non-Qualified Retirement Plans: Which is Right for You?
Both qualified and non-qualified retirement plans have their advantages and disadvantages. Depending on how your business is structured and what your needs are, can determine what types of plans you offer. If you need tax benefits, then a qualified retirement plan might be best. If you are looking for ways to allow high earners to save more than what contributions limits allow, then take the time to look at non-qualified plans. No matter which type of plan you choose, know that RPCSI is here to help you manage your plans. Contact us today to get started.
