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July 09 2012

As Dennis Duban has discussed with a number of his clients at Duban Sattler and Associates, LLP, Congress has passed several rules and limits in the last decade relating to tax-deferred 401(k) plans. These plans have cost the government a significant amount of money due to their increasing popularity, putting pressure on legislators to create policies that will minimize continued losses. Some of the new policies have seriously limited the ability of executives on higher compensation levels to make truly meaningful contributions to the 401(k) plans that the company offers. Consequently, some companies have recently turned to nonqualified plans. While these plans are not tax deductible, the employer has complete control over how the plan functions and may offer it to only a few employees, if desired. The Employee Retirement Income Security Act (ERISA), passed by the U.S. Department of Labor in 1974, actually prohibits employers from covering all employees under an unqualified plan. That said, many employers have used nonqualified plans as recruiting tools to obtain new employees, as vehicles for profit sharing, or as incentive plans.

Duban warns that employers must fully consider the implications of a nonqualified plan before instituting one. For employees, nonqualified plans represent a complete lack of security, possibly making them less alluring than other 401(k) plans. With a nonqualified plan, companies basically promise to pay the employee due benefits in the future. Employers cannot create accounts for the money owed since the Internal Revenue Service (IRS) would demand taxes paid on the pension, considering it taxable compensation. Some employers sidestep this drawback by creating a third-party account, but money in this account comes into jeopardy in the event of bankruptcy or even during a change in management. The tax benefits for employers also prove extremely limited, since they remain unable to deduct any contributions to the plan until they actually pay the benefits to the employee. Company owners should still consider nonqualified plans if they want to recruit the best executives in the nation to their ranks or if they already have several highly compensated professionals on their payroll.


An alumnus of the University of Southern California, CPA Dennis Duban founded Duban Sattler and Associates more than 30 years ago and has since offered expert insight on financial services such as tax preparation, as well as several other vital tasks, such as estate and retirement planning.

November 26 2011

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