how a non qualified plan works
there are four major types of non qualified plans the contributions made to these types of plans are usually nondeductible for the employer and taxable for the employee however they allow employees to defer taxes until retirement when they presumably will be in a lower tax bracket non qualified plans are often used to provide specialized forms of compensation to key executives or employees instead of making them partners or part owners in a company or corporation one of the other major goals of a non qualified plan is to allow highly compensated employees to contribute to another retirement plan after their qualified retirement plan contributions have been maxed out which usually happens quickly given their level of compensation deferred compensation plansthere are two types of deferred compensation plans true deferred compensation plans and salary continuation plans the primary difference between the two is in the funding source with a true deferred compensation plan the executive defers a portion of their income which is often bonus income with a salary continuation plan the employer funds the future retirement benefit on the executive s behalf both plans allow for the earnings to accumulate tax deferred until retirement when the internal revenue service irs will tax the income received as if it were ordinary income other planswith an executive bonus plan a company issues an executive a life insurance policy with employer paid premiums as a bonus premium payments are considered compensation and are deductible by the employer the bonus payments are taxable to the executive in some cases the employer may pay a bonus over the premium amount to cover the executive s taxes a split dollar plan is used when an employer wants to provide a key employee with a permanent life insurance policy under this arrangement an employer purchases a policy on the employee s life and the employer and the employee divide ownership of the policy the employee may be responsible for paying the mortality cost while the employer pays the balance of the premium at death the employee s beneficiaries receive the main portion of the death benefit while the employer receives a portion equal to its investment in the plan a group carve out plan is another life insurance arrangement in which the employer carves out a key employee s group life insurance over 50 000 and replaces it with an individual policy this allows the key employee to avoid the imputed income on group life insurance above 50 000 the employer redirects the premium it would have paid on the excess group life insurance to the individual policy owned by the employee 