Quick Answer
A qualified plan meets Internal Revenue Code (IRC) and Employee Retirement Income Security Act (ERISA) requirements, giving it tax-deductible employer contributions, tax-deferred growth, creditor-protected trust assets, and a non-discrimination requirement. A non-qualified plan skips those requirements to selectively reward executives, at the cost of creditor protection and an immediate employer deduction.
This framework is the lens for every plan type in this unit: before memorizing a plan's specific rules, place it on one side of the qualified/non-qualified line, because that placement determines its tax treatment, creditor exposure, and who it can legally cover.
What Makes a Plan Qualified?
- Employer contributions are tax-deductible to the employer when made
- Employee contributions grow tax-deferred until distribution
- Must be established for the exclusive benefit of employees and their beneficiaries
- Subject to IRC annual limits on benefits and contributions
- Must be non-discriminatory: cannot favor highly compensated employees over rank-and-file workers
- Plan assets are held in a trust, separate from the employer's general assets
- IRS approval is required
What Makes a Plan Non-Qualified?
A non-qualified plan does not meet IRC/ERISA requirements and operates under a different set of rules:
- Employer contributions are not tax-deductible until the employee receives and reports the income
- May discriminate: can be offered selectively to executives or highly compensated employees
- Assets are typically part of the employer's general assets (subject to creditors in bankruptcy)
- No IRS approval required
- No contribution limits (unlike qualified plans)
Exam Tip: Gotchas
Non-qualified plans can discriminate. This is intentional: they exist specifically to provide extra benefits to key employees. Do not confuse "non-qualified" with "illegal" or "inferior." It simply means the plan does not meet IRC/ERISA requirements for broad-based tax advantages.
Side-by-Side Comparison
| Feature | Qualified | Non-Qualified |
|---|---|---|
| IRS approval required | Yes | No |
| Tax-deductible employer contributions | Yes (when made) | No (until distributed) |
| Tax-deferred growth | Yes | Varies |
| ERISA coverage | Yes (private sector) | Generally no |
| Must be non-discriminatory | Yes | No |
| Creditor protection | Yes (ERISA shield) | No (general creditor claims) |
| Contribution limits | Yes (annual IRC limits) | No |
Exam Tip: Gotchas
- Non-qualified plan assets sit in the employer's general account and are exposed to the employer's creditors. If the company goes bankrupt, participants may lose their deferred compensation. Qualified plan assets are held in trust and protected.
- "Qualified" does not mean "better for the employee" in all cases. It means the plan meets IRS requirements for tax advantages.
- Employer contributions to non-qualified plans are NOT deductible when made; they become deductible only when the employee receives the income.
What Should You Check on Exam Day?
- Placed the plan on the qualified/non-qualified line before answering: does it require IRS approval, non-discrimination, and IRC contribution limits?
- Matched the tax-deduction timing to the plan type: qualified deducts at contribution, non-qualified deducts only at distribution.
- Confirmed whether plan assets sit in a creditor-protected trust (qualified) or the employer's general assets (non-qualified).
- Did not read "non-qualified" as "illegal" or "worse"; it is a deliberate design choice for rewarding key employees selectively.