Employers commonly rely on traditional retirement plans, like 401(k)s, to attract and retain talent. However, these plans have savings limits, which may make them inadequate for top earners who want to maximize their retirement income. Strengthening company loyalty amongst senior leaders and other highly compensated employees sometimes requires non-qualified retirement plans.
What is a non-qualified retirement plan?
A non-qualified retirement plan is an employer-sponsored savings program that falls outside the Employee Retirement Income Security Act (ERISA) guidelines. Unlike traditional 401(k)s or pensions, these plans provide greater flexibility, but do not offer the same tax benefits or protections as qualified plans.
Non-qualified plans primarily aim to help high-earning employees save more for retirement. Traditional qualified plans, like a 401(k), limit how much individuals can contribute annually. These IRS-imposed caps can leave a significant gap between top-tier earners' retirement and savings goals. Non-qualified plans bridge that gap and allow employers to offer additional retirement benefits to key employees. Providing this type of benefit sends a strong signal to top-performing employees about their value to the company.
While contributions are not tax deferred for the employer immediately, participants typically only pay taxes when they receive the funds, such as during retirement or when a payout occurs. This unique structure makes non-qualified plans valuable for companies looking to reward and retain high-performing talent.
How a non-qualified plan works
Non-qualified plans operate differently from traditional retirement plans. Their inherent flexibility rewards high earners while allowing them to sidestep some of the limitations of qualified plans.
Provided by an employer for key employees
Non-qualified plans are designed specifically for executives and high-performing talent. Unlike broad-based retirement plans, these programs can be customized to meet the specific needs of individual employees or groups of top earners.
Employers can set specific eligibility requirements and tailor the plan structure, such as deferral amounts, vesting schedules and payout terms. This targeted approach makes non-qualified plans an effective way to attract and retain key contributors.
Not subject to ERISA federal laws
Because non-qualified plans are not governed by ERISA, they can be designed and implemented without adhering to ERISAs fiduciary standards and annual reporting requirements.
Key differences of qualified and non-qualified retirement plans
While both qualified and non-qualified plans help employees save for retirement, they serve different purposes and follow separate rules.
Qualified plans, such as 401(k)s and SIMPLE IRAs, are designed to benefit a broad employee base and comply with strict IRS regulations. Non-qualified plans, on the other hand, offer a more flexible option to reward high-earning employees who may be limited by traditional savings caps.
How are non-qualified retirement plans different from qualified plans?
The main differences between qualified and non-qualified plans come down to three key areas: contribution limits, tax treatment and employee eligibility:
- Contribution limits: The IRS limits contributions to qualified plans annually (e.g., $23,500 for 401(k) plans in 2025). Non-qualified plans have no such limits.
- Tax treatment: Employer contributions to qualified plans are tax-deductible for employers and grow tax-deferred for employees until withdrawal. Non-qualified plans do not offer immediate tax deductions, but they allow employees to defer taxes until payouts occur.
- Employee eligibility: Qualified plans must be offered broadly to employees, with limits on how much highly compensated employees can contribute. Non-qualified plans can be restricted and targeted to specific employees or executives.
Qualified plans recap
Qualified plans include:
- 401(k): The most common employer-sponsored retirement plan is the 401(k).
- SEP IRA: Simplified employee pension plans are ideal for small businesses.
- SIMPLE IRA: Savings incentive match plans work well for smaller employers and employees.
Why non-qualified plans matter for high earners
IRS contribution limits in qualified plans create a significant savings gap for high earners. These employees often need more income replaced in retirement than traditional plans allow.
Non-qualified plans address this challenge by enabling key employees to defer larger compensation portions and follow a more comprehensive path to financial security. High-earning talent, who are often critical contributors to a company’s success, will appreciate it and may become more loyal to the organization.
Benefits of non-qualified retirement plans for employers
Attracting and retaining top talent requires more than just a paycheck, especially for high-level talent. Non-qualified retirement plans give businesses the tools to reward high-performing employees while controlling costs and plan design. These plans help employers stand out from competitors and meet their long-term goals.
Retaining key talent
Non-qualified plans allow employers to focus on the talent that drives results. Businesses providing meaningful, additional retirement savings keep top-tier employees engaged and invested in the company’s future.
Flexibility in plan design
Employers can adjust contributions, eligibility and vesting schedules to meet their needs. This level of control makes it easy to reward performance and align incentives with company priorities. Many times, the employer can offer the same investments in the non-qualified plan as the qualified plan.
Competitive advantage
Non-qualified plans signal a commitment to top talent. Offering unique, high-value benefits helps businesses stand out to candidates who expect more than standard compensation packages.
Financial efficiency
Non-qualified plans allow employers to defer compensation while meeting long-term financial objectives. By linking rewards to performance or future payouts, businesses can more effectively manage expenses.
Deferred-compensation plans
A common type of non-qualified plan is a deferred-compensation plan. It allow executives to postpone receiving a portion of their income until later, such as retirement. This option reduces immediate taxable income while allowing savings to grow over time. It’s a practical way for employers to align long-term rewards with employee retention.
Deferral of taxes
In deferred-compensation plan arrangements, employees can delay taxes on income until they receive payouts. This deferral reduces their taxable income in the current year and shifts the tax burden to when the funds are distributed. This often happens during retirement when they may be in a lower tax bracket.
Form W-2 reporting
Contributions to deferred compensation plans are not immediately tax deductible for employers. On the employee’s end, deferred amounts do not appear as taxable wages on their Form W-2 until they are paid out. Once distributed, the payouts are treated as ordinary income and subject to standard tax rates.
Other important tax information about non-qualified plans
Employers can generally deduct contributions to a deferred compensation plan only when the funds are paid to the employee. This timing differs from qualified plans, which permit deductions to occur upfront.
However, early withdrawals or changes to payout schedules may trigger immediate taxation and penalties. Employers and participants should carefully outline plan terms to minimize unintended tax consequences.
Given the complexity of tax rules for non-qualified plans, businesses and participants should work with a tax professional to remain compliant and maximize the plan’s benefits.
The ADP advantage: Supporting non-qualified deferred compensation plan strategies
Non-qualified deferred compensation plans require a thoughtful approach to design and administration. ADP simplifies the process. We help businesses build plans that meet their needs while minimizing administrative headaches.
Key benefits of partnering with ADP
When leveraging ADP’s expertise, businesses gain the confidence to focus on what matters most – attracting and retaining their top talent.
- Integration with payroll systems
ADP connects non-qualified plans directly with payroll operations. This simple approach reduces manual work and helps employers keep everything accurate and organized. - Administrative support
ADP provides the expertise to support compliance and keep plans running smoothly. Through an arrangement with the Angell Pension Group – a nationally recognized leader in third-party administration – ADP makes available accurate and reliable services to handle the complexities of retirement savings. - Ease of administration for 401(k) and non-qualified plans
ADP simplifies the management of both 401(k) and non-qualified plans by offering integrated solutions under one provider. This unified approach reduces the administrative burden for employers, streamlines data sharing and provides consistent support across all plan types. Employers focus on their business while ADP handles the complexities of plan management.
The smart way to reward top talent
Non-qualified retirement plans offer businesses a powerful way to attract and retain high-performing employees by addressing the unique needs of top earners. These plans go beyond the limitations of traditional retirement options and allow companies to design meaningful benefits that truly stand out in a competitive market. Due to complex tax rules, however, working with a tax professional may be necessary to support compliance and maximize the potential benefits of non-qualified plans.
ADP delivers everything you need to manage retirement benefits and help employees meet their saving goals.
Learn MoreCompliance Code:
M-667490-2025-01-14
ADP Inc. owns and operates the ADP.com website. Unless otherwise disclosed or agreed to in writing with a client, ADP, Inc. and its affiliates (ADP) do not endorse or recommend specific investment companies or products. Please consult with your own advisors for such advice. Investment options are available through the applicable entity(ies) for each retirement product. Investment options in the “ADP Direct Products” are available through either ADP Broker-Dealer, Inc. (ADP BD), Member FINRA, an affiliate of ADP, Inc., One ADP Blvd, Roseland, NJ 07068 or (in the case of certain investments) ADP, Inc. Only registered representatives of ADP BD may offer and sell ADP retirement products and services or speak to retirement plan features and/or investment options available in any ADP retirement products.
