Non-Qualified Plans

Non-qualified plans are a type of employer-sponsored retirement savings plan in the United States that does not adhere to the requirements of the Employee Retirement Income Security Act (ERISA). Unlike qualified plans, non-qualified plans offer more flexibility in contributions and benefits but lack the same tax advantages. Similar plans exist in other countries, each with unique regulations and benefits tailored to their respective legal and financial systems. 

What are Non-qualified Plans?

Non-qualified Plans are retirement savings plans that do not need to meet the requirements set by the Employee Retirement Income Security Act (ERISA). These plans are typically used to provide additional retirement benefits to key employees and executives beyond what is offered in qualified plans like 401(k)s.

Features of Non-Qualified Plans

• Selective Participation: Non-qualified plans can be offered to a select group of employees, usually executives or key personnel.
• No Contribution Limits: Unlike qualified plans, there are no strict limits on the amount that can be contributed.
• Company Flexibility: Employers have more flexibility in structuring these plans to meet the needs of both the company and the participating employees.
• No Immediate Tax Deductions: Employers do not receive an immediate tax deduction for contributions to non-qualified plans until the employee receives the benefits and pays taxes on them.
• No Discrimination Testing: Non-qualified plans do not require non-discrimination testing, which means they can be offered exclusively to highly compensated employees and executives without needing to prove that the plan does not favour them over lower-paid employees.
• No IRS Approval: These plans do not require approval from the Internal Revenue Service (IRS), allowing companies to implement and modify them more easily without undergoing a formal review process.

What are the Equivalent of Non-qualified Plans in Other Countries?

Non-qualified retirement plans are exclusive in the United States,  but it has close equivalents in other countries. Let’s discuss them in detail below: 

UK

In the UK, a close equivalent to a non-qualified plan is the Executive Pension Plan (EPP), which is also typically offered to high-earning executives and key employees. Mostly, employers pay for the premium, but there are also cases where an employee makes the contributions as well. These contributions are invested in various funds, and the government may also issue tax relief on the premium. 

Besides EPP, the UK also acknowledges private types of pensions which can be arranged by the employer.  

Australia

In Australia, the prevalent scheme is the salary sacrificing super. In this scheme, a part of the employee salary is “sacrificed,” meaning they wouldn’t receive it - instead, it goes to their superannuation fund or the workplace pension for retirement. One of the benefits of salary sacrificing super is that it reduces the employees taxable income. 

Unlike non-qualified plans, salary sacrificing super is available to all employees who agree to forgo part of their salary in exchange for additional superannuation contributions. This can be attractive to high-paying executives since they most likely have more room to sacrifice a portion of their income. 

Singapore

In Singapore, there’s the Supplementary Retirement Scheme (SRS), which is voluntary, operated by the private sector, and is meant to supplement the government’s main pension scheme (Central Provident Fund). 

Because this is voluntary, SRS is available to all individuals, but primarily utilised by high-income earners since they have the ability to contribute more. Contributions to SRS are subject to a cap and are used to purchase various investment products. 

Philippines

In the Philippines, employers can include private retirement plans for their employees. These can be investment-linked insurances and investment funds. Alternatively, employees can open a Personal Equity and Retirement Account or PERA through accredited banks or insurance companies. PERA is voluntary and employees can contribute up to P100,000 annually.  

How Do Non-qualified and Private Retirement Plans Benefit Companies?

Non-qualified plans as well as supplementary and private retirement schemes offer several advantages to companies, particularly when it comes to attracting and retaining top talent. 

• Recruitment and Retention: Non-qualified plans as well as private retirement schemes can be tailored to meet the specific needs of key employees, making them an attractive benefit that helps recruit and retain top talent.
• Flexibility: Companies can design non-qualified plans and private pension schemes to align with their business goals and employee retention strategies, offering benefits that are not constrained by the stringent regulations of qualified plans.
• Tax Deferral: By deferring taxes on contributions until withdrawal, companies can manage their cash flow more effectively while providing valuable benefits to employees.
• Incentive Alignment: Non-qualified and private retirement plans can be structured to incentivise performance and loyalty, linking benefits to the achievement of specific business objectives or long-term service.

Conclusion

Non-qualified plans offer flexible retirement savings options and certain tax advantages. Similar private retirement schemes in other countries demonstrate the diverse approaches to retirement planning. Understanding local regulations and benefits is crucial for maximising these plans' potential.

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