Benefits can be a complicated decision-making process.
Retirement benefits are an attractive part of an employee compensation package, and choosing the right options to offer requires research on the part of the employer. — fizkes/Getty Images

Employers know that offering a benefits plan is important, but depending on your employment arrangements, you may have to offer different types of plans. Retirement benefits fall in this category, with employers having to decipher between many options to decide which are best for their employees.

We’ve outlined the differences between the two different types of retirement plans: qualified employee benefit plans and non-qualified employee benefit plans.

[Read: Tailor-Made Benefits: Keeping Employees Happy Means Customizing Benefits]

What is a qualified employee benefit plan?

Simply speaking, qualified plans are benefit plans detailed in Section 401(a) of the Internal Revenue Code that meet the Employee Retirement Income Security Act of 1974 (ERISA). ERISA sets the minimum of protection standards for employees. These plans are the most stringent, as they require a number of guidelines to qualify as an ERISA plan — including vesting, benefit accrual and funding restrictions. A few of the most well-known retirement plans, including 401(k), profit-sharing plans, 403(b), and Keogh (HR-10) plans are examples of qualified plans.

A qualified benefit plan also:

  • Qualifies for certain tax benefits and government protection, including tax breaks for employers and tax credits for businesses with these plans in place.
  • Allows employee contributions and earnings to be tax-deferred until withdrawal with employers choosing the amounts they may deduct from the plan.
  • Only allows for certain types of investing which vary by plan.

The two main types of qualified employee benefit plans are a defined benefit and defined contribution structure. In a defined benefit structure, benefits are fixed with a guaranteed payout amount and the employer assumes the risk of investing. A defined contribution structure, on the other hand, involves employees selecting their investments and their retirement amounts depend on their decisions.

Competitive benefit plans are among the most important factors if you hope to attract and retain employees.

What is a non-qualified employee benefit plan?

Non-qualified plans are employee benefit plans that do not meet ERISA guidelines, leaving a more flexible plan with a variety of possibilities for employees. An employer may decide to use these plans if they want to defer a greater amount of money to a retirement plan than that of a qualified plan, or want to hire or retain an employee by providing added benefits not within the standard qualified benefit plans.

A downside of a non-qualified benefit plan is being unable to enjoy the same benefits that qualified plans offer. For instance, an employee pays taxes on funds before contributing to the plan and, in most cases, an employer is unable to claim these contributions as a tax deduction. It is important that the money contributed from employees is seeing growth in the long term. The IRS mandates the following to be in place for contributed assets to grow in a non-qualified plan:

  • Money from these plans must be separated from other employer assets.
  • They are subject to a substantial risk of forfeiture. Therefore, in the event of bankruptcy or other unforeseen events, the assets can be seized by creditors.

If both of these requirements are met, contributions to non-qualified plans will grow just like they would in any qualified plan.

Additionally, according to Investopedia, a non-qualified employee benefit plan:

  • Includes plans known as deferred-compensation, group carve-out plans, split-dollar life insurance and executive bonus plans.
  • Has no limit on contributions from the employer.
  • Requires minimal reporting and filing on the employer’s part and are usually less money to create than qualified plans.

Competitive benefit plans are among the most important factors if you hope to attract and retain employees. Carefully consider and weigh each option to determine the circumstances that will work best for your business model and are in your employees’ best interests.

[Read: Employee Benefits 101: What to Offer and How to Decide]

CO— aims to bring you inspiration from leading respected experts. However, before making any business decision, you should consult a professional who can advise you based on your individual situation.

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Published December 06, 2019