Today, millions of Americans have 401(k)s to save for retirement, but another type of retirement plan has taken off in recent years.
Non-qualified plans, which include deferred compensation plans or supplemental executive retirement plans (SERPs) offer a way to grow retirement savings beyond the limits of traditional accounts like 401(k)s and IRA. These types of retirement accounts benefit from tax-deferred growth, but some may have no contribution caps under law. Typically, they’re reserved for highly paid employees as a vehicle to grow retirement account balances even further.
So what’s the difference between qualified and non-qualified plans, and what should you consider before choosing one?
Key Takeaways
- Qualified retirement plans, including 401(k)s and IRAs, allow contributions to grow tax-free, but are restricted by IRS contribution limits.
- Non-qualified retirement plans offer similar benefits of tax-deferred growth; however, they may have no contribution caps and are only offered to high earning employees.
- Often, non-qualified retirement plans are used to recruit top talent since up to 100% of compensation can be put into these funds tax-free until it is withdrawn.
What Are the Key Differences?
As of September 2024, 401(k) plans held $8.9 trillion in assets, serving over 70 million Americans. In comparison, non-qualified deferred compensation plans held $198.8 billion in assets in 2024.
While these types of plans are comparatively smaller in size, they have grown considerably in recent years, nearly doubling since 2017. Typically, they are used to supplement 401(k) plans to help expand retirement savings for high-earning employees. Often, companies use them to help recruit employees thanks to their tax advantages.
Here’s a breakdown of how the two types of plans compare:
| Qualified vs. Non-Qualified Plans | ||
|---|---|---|
| Criteria | Qualified Plan | Non-Qualified Plan |
| Who Is Eligible? | All employees | Select employees |
| Are There Contribution Limits? | $23,500 for 401(k)s in 2025, $7,000 for IRAs | Certain limits apply to 457(b) plans |
| Are There Mandatory Distributions? | Yes, typically beginning at age 73 | Yes, for 457(b) plans |
| Are Assets Protected From Creditors? | Yes | Governmental 457(b) plans are protected, non-governmental 457(b) plans may not be |
| Is it Possible to Rollover to an IRA if Terminated? | Yes, subject to plan terms | Governmental 457(b) plans can rollover |
| Is it Possible to Take Out a Loan? | Yes, subject to plan terms | Yes, subject to plan terms |
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How Non-Qualified Plans Work
Non-qualified plans, like deferred compensation plans, allow employees to choose the events when their deferred income is paid out by their employer. These events can include retirement, termination, death, or a set date determined by the employee.
Unlike qualified plans, where penalty-free distributions start after age 59 ½, non-qualified plans offer greater flexibility; however, employees are bound by the original terms set under the plan. But with non-qualified retirement plans, you can set a specific date to defer payments to help save for major expenses, like a child’s college education.
It’s worth noting a key risk of non-qualified plans: funds in non-governmental 457(b) plans are not protected from company creditors since they are not subject Employee Retirement Income Security Act (ERISA) regulations. Since the money in these non-qualified plans are classified as a company asset, creditors can seize some or all of these funds in the event of a bankruptcy. In comparison, 401(k) funds are subject to ERISA regulations.
The Bottom Line
Both qualified and non-qualified retirement plans benefit from tax-deferred growth, allowing investment gains to compound tax-free.
If you’re among the highest-paid employees in a firm, you may be offered a non-qualified plan, which allows for greater flexibility to grow your retirement savings. These plans can be a valuable tool to supplement 401(k)s or IRAs, but it’s important to assess the risks and rewards before committing to this type of plan.