What Is a Nonqualified Retirement Plan?

How Nonqualified Retirement Plans Work

Employers use nonqualified retirement plans to attract and retain high-income employees by helping them save more for retirement. Experts generally advise putting 15% of your pretax income into a retirement plan each year. But IRS limits on contributions to qualified retirement plans can make it difficult for people who earn a lot of money to meet this goal.

Example: Based on the 15% guideline, a 45-year-old executive earning $500,000 annually should save $75,000 per year for retirement. However, in 2026 the maximum people under age 50 can contribute to a 401(k) plan is $24,500—just 4.9% of the executive's income.

Nonqualified retirement plans aren't subject to these contribution limits, enabling highly paid employees to save more appropriately for retirement. Employers can set up a nonqualified retirement plan that applies to all the company's executives or can tailor individual contracts to the needs of each executive.

While plans can differ, the most common type of nonqualified plan is a deferred compensation plan, which allows you to defer compensation, including salary and bonuses, to a future date. (More on that below.) Distributions often occur at retirement, but some plans allow you to choose earlier distribution dates. Money is deferred pretax, reducing your current taxable income. Taxes are generally deferred until distribution, which could result in tax savings if you're in a lower tax bracket when your distribution is paid out.

Learn more: How Much to Save for Retirement

Types of Nonqualified Retirement Plans

Nonqualified retirement plans generally fall into one of four types:

1. Deferred-Compensation Plans

Nonqualified deferred-compensation plans allow you to defer compensation (including salary and bonuses) until a future date and pay taxes on the money at that time. Most often, compensation is deferred until you leave the company or retire, but many plans let you choose a distribution date yourself. Depending on your plan, you may be able to take distributions as a lump sum, in installments or a combination of both.

2. Executive Bonus Plans

In an executive bonus plan, your employer pays the premiums on a permanent life insurance policy that you own. You are the policy owner, can choose the beneficiary and can typically borrow against or withdraw from the policy's cash value as it grows. Keep in mind that the premium payments the employer makes on your behalf are generally considered taxable compensation.

3. Split-Dollar Life Insurance Plans

Split-dollar life insurance plans split the premiums, death benefits and cash value of a permanent life insurance policy between you and your employer. Typically, your employer pays the portion of the premiums equal to the policy's cash value, and you pay the rest.

4. Group Carve-Out Plans

Group carve-out plans replace your employer-provided group term life insurance above $50,000 with permanent life insurance for the same amount. Your employer usually pays the premiums on both policies. Your group life insurance terminates with employment, but you own the permanent life insurance policy and can keep it after leaving the company, as long as you pay the premiums.

Nonqualified vs. Qualified Retirement Plans

Qualified retirement plans must comply with IRS codes and, if sponsored by an employer, must comply with the Employee Retirement Income Security Act (ERISA). This federal law protects participants by setting standards for nondiscrimination, when contributions vest and are distributed, the information participants receive about the plan and more. ERISA also requires employers to file reports and holds plan fiduciaries accountable.

Examples of qualified retirement plans include:

• 401(k) plans
• 403(b) plans
• Money purchase pension plans
• Cash balance pension plans
• Simplified employee pension (SEP) plans
• Savings Incentive Match Plans for Employees (SIMPLE) IRAs
• Employee stock ownership plans (ESOPs)
• Profit-sharing plans
• Stock bonus plans

The table below highlights the key differences between qualified and nonqualified retirement plans.

Learn more: How Does a 401(k) Loan Work?

Questions to Ask if You're Offered a Nonqualified Retirement Plan

If your employer offers you a nonqualified retirement plan, ask yourself these questions before you decide to participate.

• Have I already maxed out my 401(k) and IRA accounts? It's generally advisable to contribute the maximum to other retirement accounts before participating in a nonqualified plan.
• How flexible is the distribution schedule? You may be required to defer income until retirement or leaving your job. If you want to save for future events such as a child's college tuition, you'll want a plan that lets you choose your own distribution date.
• Can I afford to defer this income? Changing your distribution date once it's set is difficult and is subject to plan rules and tax law. Be sure you can live without the money until then.
• How will deferring income affect my tax liability? Deferring compensation can reduce your current taxable income. Consider your future tax bracket and other income sources to decide if deferring compensation offers future tax savings too.
• What investment choices, if any, are available? Make sure you're happy with the options.
• Can I afford to lose this money? Money in a nonqualified retirement plan generally remains part of your employer's assets. If the company becomes insolvent, you could lose some or all of your deferred compensation.
• How are distributions paid? A lump-sum distribution means you'll owe taxes on the full amount, which could be costly. Installment distributions over time can lower your tax bill while the rest of your money keeps growing. However, your former employer still controls the remaining funds, which could be risky.

Tip: Consulting a financial planner can help you decide whether a nonqualified retirement plan fits into your overall financial strategy.

Learn more: Retirement Planning Guide

Risks of Nonqualified Plans

Nonqualified retirement plans have potential benefits, but there are also some important risks to consider.

Learn more: Are You Saving Too Much for Retirement?

Frequently Asked Questions

The Bottom Line

Nonqualified retirement plans won't replace a 401(k), IRA or other retirement savings vehicle. If you've already maxed out these tax-advantaged options and are eligible for a nonqualified plan, carefully consider the benefits and risks before participating.

Working with a financial planner can help you determine whether a nonqualified retirement plan fits into your overall goals, how to structure a plan to minimize taxes and how to manage your income in retirement. As you work to protect your financial future, consider signing up for free credit monitoring from Experian to keep tabs on your credit.