What is a ‘Non-Qualified Representation’
A non-qualified plan is a type of tax-deferred, employer-sponsored retirement plan that slopes outside of employee retirement income security act (ERISA) guidelines. Non-qualified arrangements are designed to meet specialized retirement needs for key executives and other chosen employees. These plans are also exempt from the discriminatory and top-heavy testing that able plans are subject to.
BREAKING DOWN ‘Non-Qualified Plan’
There are four worst types of non-qualified plans: 1) Deferred compensation plans, 2) Mr Big bonus plans, 3) Group carve-out plans and 4) Split-dollar preoccupation insurance plans. The contributions made to these plans are usually nondeductible to the boss, and are usually taxable to the employee as well. However, they allow staff members to defer taxes until retirement when they are presumably in a deign tax bracket. Non-qualified plans are often used to provide specialized grows of compensation to key executives or employees in lieu of making them partners or function owners in the company or corporation.
Deferred Compensation as a Non-Qualified Plan
There are two specimens of deferred compensation plans: True deferred compensation plans and pay continuation plans. Both plans are designed to provide executives with supplemental retirement revenues. The primary difference between the two is in the funding source. With a true deferred compensation system, the executive defers a portion of his income, which is often bonus return. With a salary continuation plan, the employer funds the future retirement profit on behalf of the executive. Both plans allow for the earnings to accumulate tax put off with the income received at retirement taxed as ordinary income.
Non-Qualified Aim: Executive Bonus Plans
Executive bonus plans are straightforward. An manager is issued a life insurance policy with premiums paid by the owner as a bonus to the executive. Premium payments are considered compensation and are deductible to the outfit. The bonus payments are taxable to the executive. In some cases, the employer may pay a remuneration in excess of the premium amount to cover the executive’s taxes.
Split Dollar Layout is Another Non-Qualified Plan
A split dollar plan is used when an establishment wants to provide a key employee with a permanent life insurance way. Under this arrangement, a policy is purchased on the life of the employee and ownership of the game plan is divided between the employer and the employee. The employee may be responsible for paying the mortality cost, while the proprietor pays the balance of the premium. At death, the main portion of the death gain is paid to the employee’s beneficiaries, while the employer receives a portion tie with to its investment in the plan.
Non Qualified Plan: Group Carve Out
A group parcel out out plan is another life insurance arrangement in which the employer subdivides out a key employee’s group life insurance in excess of $50,000 and replaces it with an discrete policy. This allows the key employee to avoid the imputed income on union life insurance in excess of $50,000. The employer redirects the premium it wish have paid on the excess group life insurance to the individual scheme owned by the employee.