Should I put in a Qualified or Non-qualified Plan?

A Qualified plan is described in the Internal Revenue Code as eligible for tax-favored treatment. Typically, contributions to the plan are not taxable to the employee and are deductible for the employer at the time they are made. Growth is usually tax-deferred. Qualified plans usually have these characteristics:

• A qualified plan may not discriminate in favor of the highly-paid or key employees
• Benefits may only be used for retirement or certain limited permitted distributions

A Non-qualified plan, by extension, is any plan not described in the Code. Typically, contributions are not deductible to the employee or the company at the time they are made, but benefits may be deductible to the employer when paid out. Growth may or may not be tax-deferred depending on the format of the plan. A non-qualified plan has several advantages:

• Generally the plan must discriminate in favor of a select group of employees
• The plan may provide for benefits other than retirement
• Some benefits may be non-taxable
• Contributions can fluctuate from year to year at the discretion of the employer
• Growth may be tax-deferred
• Employees may shelter additional moneys beyond the employer’s contributions
• Vesting schedules can be very long (golden handcuff provisions)
• Unvested money may be available for loan to the employer
• Vested money may be available for loan to the employee