Series 6: Retirement Plans (Retirement Plan Overview)
Which statement concerning required distributions from qualified retirement plans is correct?
Failure to take required distributions results in a 50% penalty tax If the minimum distribution is not taken, there is a punitive 50% tax on the difference between the actual amount withdrawn and higher amount that should have been withdrawn. This is in addition to regular income tax due on the amount withdrawn. Required distributions must begin in the year after the individual turns 70 ½.
Under ERISA rules, an employee that works for 2 years for an employer that has a pension plan funded by employer contributions and a 5 year vesting schedule will be:
partially vested When an employer makes a contribution to a retirement plan for an employee, the employee does not immediately own 100% of that pension benefit. Under ERISA, contributions made for employees must vest over no more than 6 years. For example, if an employer includes a 5-year vesting schedule in the plan, this means that the employee gains ownership of the benefit at the rate of 20% per year. After 2 years of participation, the employee owns 40% of the pension benefit - this amount is not forfeited ("given back to the company") if the employee quits or is fired. The employee retains ownership of 40% of the benefit and forfeits the other 60%.
Which statement is true regarding the tax treatment of contributions and earnings in an employer-sponsored qualified retirement plan?
Contributions made by the employer are tax-deductible to the employer and earnings on plan assets are not taxable annually to either the employer or the employee Contributions made to employer-sponsored qualified retirement plans are deductible to the employer. Earnings on plan assets build tax-deferred. When distributions commence, 100% is taxable to the recipient.
Which of the following statements concerning non-qualified deferred compensation plans is TRUE?
An employer may not deduct contributions to the plan in the year they are made The best answer is A. Employers typically offer a non-qualified deferred compensation plan as a "bonus" to their executives. The amount of retirement benefit for highly compensated executives is limited under a corporation's qualified retirement plan, so additionally offering a non-qualified plan gives the company a way to supplement a highly-compensated executive's retirement income. These are often called "deferred compensation plans." Thus, a non-qualified retirement plan can discriminate as to who will be covered. Contributions to the plan are not deductible by the employer. The employer will have annual taxable income from plan earnings (unless it uses a tax-deferred investment such as a life insurance policy) for the plan. When the employee receives the benefit, such as the deferred compensation, each payment received is taxable to the recipient (and deductible to the employer) at that time. Note that if the plan provides security for payment of benefits (meaning that the creditors of the company have no claim on the assets if the company goes bankrupt, so the employee benefit is "secure"), then the employees will be subject to tax on the benefit, so the plan generally provides no such security. Non-qualified plans need not meet all ERISA standards. They are not subject to ERISA non-discrimination, vesting, and minimum funding rules. However, they are subject to ERISA filing and reporting requirements.
Which statement is TRUE?
With a defined benefit plan, the employees know how much benefit they will receive at retirement With a defined benefit plan, the employer selects the level of benefits that will be paid to employees, so employees know how much benefit they will receive at retirement. The employer must use an actuary to determine the amount of contributions required to fund this "defined benefit." The employee does not know, nor should he or she really care about, the actual amount contributed to the plan each year. If the employer defaults, PBGC will come in to rescue the plan. With a defined contribution plan, the employer specifies annual contributions, such as a fixed percentage of income or a fixed dollar amount for employees, so the employees know how much the employer is contributing. The amount of benefit depends on the total amount contributed plus investment performance, so the employee does not know the amount that will be received at retirement. There is no actuary, because with a defined contribution plan, what is put in plus any growth in assets is what the employee gets out of the plan. Also, there is no PBGC insurance for a defined contribution plan, and the employee runs the risk of outliving the payments.
Which of the following are characteristics of money purchase Defined Contribution Plans? I Annual contribution rates are fixed II If the corporation has an unprofitable year, the contribution may be omitted III The annual benefit varies dependent on the number of years that the employee is included IV This type of plan is not subject to ERISA requirements
I and III Under a money purchase defined contribution plan, a fixed percentage of income is contributed annually for each year that the employee is included in the plan. Thus, the ultimate benefit to be received by the employee depends on the number of years he or she has been included in the plan and the annual amounts contributed. If the corporation has an unprofitable year, it must still make the contributions. Such plans are subject to ERISA requirements. Also note that there is a dollar cap on the maximum annual contribution ($56,000 for employer contributions and $19,000 for employee contributions for 2019).
Under which of the following circumstances can a person who is younger than age 59 1/2 make withdrawals from a qualified retirement plan without penalty?
The person is now disabled and cannot work A withdrawal from a qualified retirement plan before age 59 1/2 is a premature distribution. A premature distribution can avoid the 10% penalty if the distribution is due to the person's death or disability and for some other reasons. These "other" reasons (which are not likely to be tested) include use of the funds to pay for large medical expenses, a property division in a divorce settlement, or the individual is age 55 or older and has terminated employment, and will take payments out of the plan to deplete it over that person's remaining life.
Which statement concerning defined benefit and defined contribution plans is correct?
Younger employees prefer defined contribution plans over defined benefit plans Younger employees prefer defined contribution plans over defined benefit plans, because they can accumulate a larger total benefit over the long period of time that the employer will make annual contributions for them. Generally, employers prefer defined contribution plans over defined benefit plans because the employer does not carry investment risk nor longevity risk (and people are living longer!) with a defined contribution plan. PBGC coverage is only given to defined benefit plans, where a default by the sponsor could leave the employees without a pension. PBGC coverage is not given to defined contribution plans, since the employee will always get the contributions made, plus any growth in the investments, as the pension benefit.
All of the following statements are true regarding defined benefit plans EXCEPT:
benefits paid to employees consist of a tax free return of capital and a taxable return of earnings Since a defined benefit plan is a "tax qualified" retirement plan, contributions are tax deductible and earnings "build up" tax deferred. When distributions commence, since none of the funds were ever taxed, the distribution amounts are 100% taxable. The other statements about defined benefit plans are true - contributions are based on actuarial assumptions; contributions can vary from year to year (the contribution amount depends on the performance of assets held in the plan as well as the age and sex of plan participants); and older employees with high salaries will benefit the most, since the biggest contributions must be made to fund their retirement benefit.
ERISA legislation was enacted to protect:
employee retirement funds from employer mismanagement ERISA was enacted to protect employee retirement funds from employer mismanagement.
A client is a participant in an employer's non-contributory qualified pension plan. The total contributions are $10,000, and the plan's current value is $16,000. If this individual retires now, his or her cost basis in the plan is:
0 In a non-contributory plan, the employer, not the employee, makes all contributions to the qualified plan. With both contributory and non-contributory plans, the plan participant has no cost basis for deductible contributions (since these contributions reduced taxable income when deducted, they are "never taxed" dollars). Thus, all $16,000 is taxable as ordinary income when the participant receives distributions at retirement.
Which of the following risks is the greatest risk for an employee concerning the assets in a non-qualified deferred compensation plan?
Business failure risk With a non-qualified deferred compensation plan, the employer's promise to pay benefits is unsecured. In a bankruptcy of the employer, the assets in the non-qualified plan are available to the general creditors of the failed company. If the employer structures the plan to shield the assets from creditors, then the income becomes taxable annually to the employee instead of the employer, so this benefit is not offered. Thus, the employee bears the risk that the employer will go bankrupt, and the employee will have the status of an unsecured creditor. Unsecured creditors often receive only a small percentage of their claims in the event of bankruptcy. The employee's main risk, therefore, is the business failure of the employer.
At age 63, Cindy took early retirement after working 20 years at her company. How will the distributions to Cindy from the company's non-qualified retirement plan be treated for income tax purposes?
The distributions will be taxed as ordinary income Employer contributions to a non-qualified retirement plan are not deductible and plan earnings are taxable each year to the employer. These are all "after-tax" dollars. When the employer makes distributions from the plan, the distribution amount is 100% deductible to the employer and is 100% taxable ordinary income to the employee.
Which of the following statements concerning qualified and non-qualified retirement plans are correct? I An employer with a qualified plan may not add a non-qualified plan II An employer with a qualified plan may add a non-qualified plan III An employer can avoid paying income taxes on investment earnings in a qualified plan invested in equities IV An employer can avoid paying income taxes on investment earnings in a non-qualified plan invested in equities
II and III An employer that has a qualified plan may add a non-qualified plan, and typically does so to provide an added retirement benefit to highly compensated executives in the form of a non-qualified salary deferral plan. An employer avoids paying income taxes on investment earnings with a qualified plan. Regarding a non-qualified plan, if the plan is invested in equities (as is the case in Choice IV), then the annual income will be taxable. In order for the annual earnings not to be taxable in a non-qualified plan, they can be invested in an insurance policy, such as a variable universal life policy.
Which of the following statements concerning defined contribution plans is (are) correct?
The annual contribution is predetermined The investment risk is carried by the employee The longevity risk is carried by the employee With a defined contribution plan, the employer's annual contribution is predetermined. The employee carries the investment risk because the employer does not guarantee a level of benefits. The employee carries the longevity risk because he or she can outlive the amount that has been accumulated in the plan for that individual. Finally, there is a dollar cap on the maximum annual contribution ($56,000 for employer contributions and $19,000 for employee contributions for 2019).
An individual who has participated in a corporate qualified defined benefit retirement plan for many years retires and begins to receive distributions. How does the IRS tax these payments?
The payments are 100% ordinary income The employer made the contributions to the plan and received a tax deduction for these. The participant did not pay tax on them, nor did the participant pay tax on earnings during the accumulation period. Thus, all of the dollars in the plan have never been taxed. The result is that the participant will pay ordinary income tax (not capital gains tax) on 100% of payments taken at retirement time.
All of the following statements concerning benefits that can be obtained by employer retirement plans from complying with ERISA are correct EXCEPT an:
employer will receive a tax credit for distributions to employees If a retirement plan complies with ERISA, the employer gets a deduction for contributions made for employees. There is no tax to the employee at the time that the contribution is made. The earnings build tax-deferred, so there is no annual income tax due. When distributions are taken, 100% of the distribution amount is taxable to the employee. There is no tax credit at the time of distributions to employees.
A corporation that has adopted a qualified retirement plan for all of its employees:
may adopt a non-qualified plan to provide additional benefits to its high-earning executives ERISA rules limit retirement benefits provided by a qualified plan to a maximum amount of about $200,000 per year. While this provides ample retirement income to the vast majority of employees, the high-earning top executives of a company often find this to be inadequate. To retain these executives, the company will often create a separate non-qualified retirement plan only available to key executives These are so-called "deferred compensation plans" that provide additional benefits on top of those offered by the company's qualified retirement plan. These plans do not comply with ERISA's non-discrimination, funding and vesting rules. The contributions made by the employer are non-deductible to the employer ("after-tax" dollars). The earnings build-up is taxable each year to the employer (again, "after-tax" dollars). The employee has no ownership rights in plan assets (no "vesting"). When distributions are made, the amount paid is a deductible expense to the employer and is taxable income to the employee. Note that the tax-treatment for this type of non-qualified plan differs from the tax treatment given to variable annuities purchased by an individual for his or her own benefit. If the employer establishes the non-qualified plan, contributions are not deductible and annual earnings are taxable to the employer. If an individual buys a variable annuity (not a corporation buying for its employees), the contribution is not deductible, but the earnings build tax-deferred.
All of the following statements regarding non-qualified retirement plans are true EXCEPT:
the plan need not conform with any ERISA rules shit's true: contributions are made with after-tax dollars the obligation to pay benefits to an employee must be unsecured the plan may be discriminatory Employers typically offer a non-qualified deferred compensation plan as a "bonus" to their executives. The amount of retirement benefit for highly compensated executives is limited under a corporation's qualified retirement plan, so additionally offering a non-qualified plan gives the company a way to supplement a highly-compensated executive's retirement income. These are often called "deferred compensation plans." Thus, a non-qualified retirement plan can discriminate as to who will be covered. Contributions to the plan are not deductible by the employer. The employer will have annual taxable income from plan earnings (unless it uses a tax-deferred investment such as a life insurance policy) for the plan. When the employee receives the benefit, such as the deferred compensation, each payment received is taxable to the recipient (and deductible to the employer) at that time. Note that if the plan were to provide security for payment of benefits (meaning that the creditors of the company cannot claim plan assets if the company goes bankrupt, so the employee benefit is "secure"), then the employees will be subject to tax on the benefit. Thus, non-qualified deferred compensation plans give no such security and if the company goes bankrupt, the creditors can claim the plan assets. In contrast, qualified plans provide security for payment of benefits and if the company goes bankrupt, creditors cannot claim qualified plan assets. Non-qualified plans need not meet all ERISA standards. They are not subject to ERISA non-discrimination, vesting, and minimum funding rules. However, they are subject to ERISA filing and reporting requirements.
An individual is a participant in a corporate non-qualified retirement plan. Once the individual retires and distributions commence, each payment will be subject to tax as:
100% ordinary income Employer contributions to a non-qualified retirement plan are not deductible and plan earnings are taxable each year to the employer. These are all "after-tax" dollars. When the employer makes distributions from the plan, the distribution amount is 100% deductible to the employer and is 100% taxable ordinary income to the employee.
Which statement concerning the benefits from ERISA compliance for company retirement plans is TRUE?
An employee is not subject to annual income tax on investment earnings When an employer retirement plan complies with ERISA, the employer can deduct contributions and the employee is not subject to income tax on investment earnings. The reinvested earnings build tax-deferred. The employee is not subject to income tax until distributions are made from the plan.
All of the following are characteristics of money purchase Defined Contribution Plans EXCEPT:
Annual contribution percentages can vary Under a money purchase defined contribution plan, a fixed percentage of income is contributed annually for each employee included in the plan. If the corporation has an unprofitable year, it must still make the contribution. Also note that there is a dollar cap on the maximum annual contribution ($56,000 for employer contributions and $19,000 for employee contributions for 2019).
Which statement is true about employer-sponsored non-qualified retirement plans?
Contributions are not deductible to the employer and earnings are taxable to the employer Employer-sponsored non-qualified retirement plans do not adhere to ERISA's non-discrimination, funding and vesting requirements. These are typically "add-on" retirement plans on top of the corporation's qualified retirement plan, and are used to provide additional retirement benefits to key executives. The contributions made by the employer are non-deductible and annual earnings on plan assets are taxable to the employer. When distributions are made, each payment is taxable income to the recipient and the employer gets to deduct the payment amount as an ordinary business expense. Note that the tax-treatment for this type of non-qualified plan differs from the tax treatment given to variable annuities purchased by an individual for his or her own benefit. If the employer establishes the non-qualified plan, contributions are not deductible and annual earnings are taxable to the employer. If an individual buys a variable annuity (not a corporation buying for its employees), the contribution is not deductible, but the earnings build tax-deferred.
Which statement about employer-sponsored qualified and non-qualified retirement plans is correct?
Contributions to a qualified plan are made with before-tax dollars Contributions to an employer-sponsored qualified plan are made with before-tax dollars, which means the employer gets to take an income tax deduction on contributions made for the employee. Earnings in the plan build tax-deferred and when distributions are taken, 100% of the distribution is taxable to the employee. Contributions to an employer-sponsored non-qualified plan are made with after-tax dollars, which means the employer gets no income tax deduction on contributions made for the employee. Earnings in the plan are taxable annually to the employer. When distributions commence, each payment made is deductible to the employer and is taxable income to the employee. Non-qualified plans need not meet all ERISA standards. They are not subject to ERISA non-discrimination, minimum vesting and minimum funding rules. However, they are subject to ERISA filing and reporting requirements. An employer can have both a qualified and a non-qualified plan. The qualified plan covers all employees and the non-qualified plan is an "add-on" benefit given to highly compensated executives only.
Which statement is true regarding the tax treatment of contributions and earnings in an employer-sponsored non-qualified retirement plan?
Employer contributions are not deductible by the employer and earnings on plan assets are taxable annually to the employer Employer-sponsored non-qualified retirement plans do not adhere to ERISA's non-discrimination, funding and vesting requirements. These are typically "add-on" retirement plans on top of the corporation's qualified retirement plan, and are used to provide additional retirement benefits to key executives. The contributions made by the employer are non-deductible and annual earnings on plan assets are taxable to the employer. When distributions are made, each payment is taxable income to the recipient and the employer gets to deduct the payment amount as an ordinary business expense. Note that the tax-treatment for this type of non-qualified plan differs from the tax treatment given to variable annuities purchased by an individual for his or her own benefit. If the employer establishes the non-qualified plan, contributions are not deductible and annual earnings are taxable to the employer. If an individual buys a variable annuity (not a corporation buying for its employees), the contribution is not deductible, but the earnings build tax-deferred.
Which of the following is (are) defined-contribution retirement plan(s)? I Profit-sharing plan II 401(k) plan III Individual Retirement Account (IRA)
I and II A profit-sharing plan is one of the defined-contribution retirement plans available to an employer, as is a 401(k) plan. An Individual Retirement Account is neither a defined contribution plan nor a defined benefit plan. Remember that defined benefit or defined contribution plans are employer-established plans under ERISA. In contrast, anyone with earned income can set up their own IRA account.
Which of the following are formulas used by defined benefit plans? I Final average pay plan II Profit-sharing plan III Career average pay plan IV 401(k) plan
I and III A defined benefit plan defines a pension benefit based on a formula. Such formulas include "FAP" - Final Average Pay - which typically averages the final 3 years' salary of the retiree and uses this as the base to determine the pension payment. Another averages the person's wages over his or her career at that employer, called "Career Average Pay." Another is "Dollar Times Service" - which might define the pension benefit as "$100 per monthly payment for each year of service." In this defined benefit plan, a person who works for 30 years and then retires would receive a monthly pension payment of 30 x $100 = $3,000. Defined contribution plans set a fixed annual contribution amount that is contributed to an account set aside for that individual. The amount contributed and the growth of the assets in the account will determine the pension benefit. Types of defined contribution plans include money purchase plans, 401(k) and 403(b) plans, and profit sharing plans.
Which of the following are characteristics of money purchase Defined Contribution Plans? I Annual contribution rates are fixed II Annual contribution rates will vary III The benefit amount to be received is fixed IV The benefit amount to be received will vary
I and IV Under a money purchase defined contribution plan, a fixed percentage is contributed annually for each year that the employee is included in the plan. The longer an employee is in the plan, the greater the benefit that he or she will receive at retirement. Also note that there is a dollar cap on the maximum annual contribution ($56,000 for employer contributions and $19,000 for employee contributions for 2019).
Which of the following statements are TRUE about ERISA rules? I ERISA requires employers to establish and maintain retirement plans II ERISA only applies to private employers III ERISA specifies standards for retirement plans IV ERISA regulations allow tax-free income when distributions are taken
II and III ERISA does not require employers to establish or maintain retirement plans. ERISA regulations apply only to private employers and not to state or federal retirement plans. By meeting ERISA standards, a retirement plan will qualify for the tax advantage of getting a tax deduction for contributions made. The contribution amount is not taxable income to the employee. At the time that distributions commence, 100% of any distribution is taxable income to the employee.
Which statements are true regarding the tax treatment of contributions and earnings in an employer-sponsored non-qualified retirement plan? I Contributions are deductible to the employer II Contributions are not deductible to the employer III Earnings on plan assets are taxable annually to the employer IV Earnings on plan assets build tax-deferred until distributions commence
II and III Employer-sponsored non-qualified retirement plans do not adhere to ERISA's non-discrimination, funding and vesting requirements. These are typically "add-on" retirement plans on top of the corporation's qualified retirement plan, and are used to provide additional retirement benefits to key executives. The contributions made by the employer are non-deductible and annual earnings on plan assets are taxable to the employer. When distributions are made, each payment is taxable income to the recipient and the employer gets to deduct the payment amount as an ordinary business expense. Note that the tax-treatment for this type of non-qualified plan differs from the tax treatment given to variable annuities purchased by an individual for his or her own benefit. If the employer establishes the non-qualified plan, contributions are not deductible and annual earnings are taxable to the employer. If an individual buys a variable annuity (not a corporation buying for its employees), the contribution is not deductible, but the earnings build tax-deferred.
Which of the following statements concerning defined benefit plans are correct? I The amount of annual contributions is fixed II The employee assumes inflation risk before retirement III The benefit paid at retirement is fixed and is based on the plan formula IV The maximum annual benefit payment is capped by Federal law
III & IV only With defined benefit plans, a formula fixes annual benefits at the time of retirement. The employer adopts the formula at the start of the plan. The formula may provide, for example, for a percentage of final income for each year of service. Thus, at retirement, the number of years of service and final income fix the actual benefit. This maximum benefit cannot exceed about $225,000 annually (this amount is indexed for inflation each year). Employees earning less than this maximum cannot receive a benefit that is more than 100% of the average of their 3 highest paid consecutive years. This is called a "final average pay" formula, and as wages rise (often due to inflation adjustments), so does the retirement benefit. Thus, inflation risk is carried by the employer prior to retirement; but once the benefit is calculated and payments commence, the benefit does not increase. Thus, inflation risk is carried by the employee once retirement payments commence.
Which of the following are characteristics of defined benefit plans? I Fixed annual contribution amounts II If the corporation has an unprofitable year, it may omit contributions III Fixed annual benefit payment to retired employees IV Greater contributions are made for older employees nearing retirement
III and IV Under defined benefit plans, the employer contributes on behalf of the employees to fund a defined future benefit. With this type of plan, the employer contributes lesser amounts on behalf of younger employees and more money on behalf of the older employees. Once a person retires, the benefit amount remains fixed. Some plans base the amount on the retiree's last 3-5 years' salary and years of plan participation. There are no fixed annual contributions to defined benefit plans. The actual annual contribution depends upon actuarial assumptions about the plan participants. If the corporation has an unprofitable year, it must still make the contribution amount as the actuary determines.
Which ERISA rules prohibit employers from designing retirement plans to benefit highly-paid employees disproportionately over other employees?
Non-discrimination rules Non-discrimination rules prohibit employers from designing retirement plans to benefit highly-paid employees disproportionately over lower-paid employees. Funding rules apply to so-called "defined benefit" plans, where employers must make minimum funding contributions to fund their future pension liability to employees. Fiduciary responsibility rules require that a plan trustee be appointed to act in the employees' best interests when making decisions about the plan. Contribution limits are set under ERISA so that employers do not get to make excessively large tax-deductible contributions, overly reducing their taxable income (remember, the government needs to collect taxes to run).
Which of the following guarantees pension benefits in the event of a default by the employer?
PBGC The Pension Benefit Guaranty Corporation (PBGC) guarantees pension benefits for defined benefit plans. If the corporation funding the plan goes bankrupt, then there is no one to continue funding the plan. PBGC will assume responsibility for the plan, though it may reduce pension benefits paid. There is no similar guarantee for defined contribution plans, since whatever is contributed is segregated for the employee, and the employee receives the contribution amount plus any growth as the retirement benefit. SIPC is the Securities Investor Protection Corporation and insures each separate customer account at a brokerage firm in the event of the firm's failure. FDIC is the Federal Deposit Insurance Corporation and insures bank deposits. FINRA is the Financial Industry Regulatory Authority, which is the self-regulatory organization overseeing broker-dealers in the United States.
Which of the following features of a non-qualified retirement plan would most likely be a serious issue requiring correction?
The plan will pay benefits from assets that cannot be reached by the employer's creditors Qualified plans place retirement assets in a trust account, where, if the company goes bankrupt, the company's creditors have no claim to those assets. Non-qualified retirement plan assets cannot be held by such a trustee - they must be "at risk" if the company goes bankrupt - meaning that these assets could be seized by the employer's creditors, and they would not be paid out as a retirement benefit. Non-qualified plans do not have to meet ERISA's non-discrimination, minimum funding, and minimum vesting requirements. They are typically salary deferral plans only offered to highly-compensated executives, so they are discriminatory. Long vesting and lack of contributions by the employer are also acceptable since ERISA does not apply to these aspects of non-qualified plans. Only ERISA's reporting rules apply.
All of the following statements concerning defined benefit plans are correct EXCEPT:
investment risk is carried by the employees With a defined benefit plan, the investment risk is carried by the employer, because the employer guarantees a selected level of benefits regardless of the investment performance of the plan assets - so Choice (D) is false. The other statements are true - pension payments are made for the employee's life; PBGC (Pension Benefit Guaranty Corp.) insures defined benefit plans if the sponsor defaults; and defined benefit plans favor older workers with fewer years to retirement while defined contribution plans favor younger workers with many years to retirement.
If a corporation has an unfunded pension liability, this means that:
the expected future value of fund assets is less than projected benefit claims An unfunded pension liability means that expected payments from the retirement plan are in excess of the expected future assets in the plan. It is common for defined benefit pension plans to be underfunded, but the plan trustee is responsible to insure that future funding is adequate as needed. Note that only defined benefit plans can have such an unfunded pension liability; defined contribution plans base the pension payment on the amount actually in the plan for that participant and cannot have an unfunded pension liability.
The most likely reason for an employer to adopt a non-qualified deferred compensation plan is the employer wants:
to provide additional retirement benefits only to a select group of executives Employers typically offer a non-qualified retirement plan as a "bonus" to their executives. The amount of retirement benefit for highly compensated executives is limited under a corporation's qualified retirement plan, so additionally offering a non-qualified plan gives the company a way to supplement a highly-compensated executive's retirement income. These are often called "deferred compensation plans." Thus, a non-qualified retirement plan can discriminate as to who will be covered. Contributions to the plan are not deductible to the employer. The employer will have annual taxable income from plan earnings (unless it uses a tax-deferred investment such as a life insurance policy) for the plan. When the employee receives the benefit, such as the deferred compensation, each payment received is taxable to the recipient (and deductible to the employer) at that time. Note that if the plan were to provide security for payment of benefits (meaning that the creditors of the company cannot claim plan assets if the company goes bankrupt, so the employee benefit is "secure"), then the employees will be subject to tax on the benefit. Thus, non-qualified deferred compensation plans give no such security and if the company goes bankrupt, the creditors can claim the plan assets. In contrast, qualified plans provide security for payment of benefits and if the company goes bankrupt, creditors cannot claim qualified plan assets.
