Non-Qualified Plans (W-2)

What Are Non-Qualified Plans (W-2)?

The non-qualified plan on a W-2 is a type of retirement savings plan that is employer-sponsored and tax-deferred. They are non-qualified because they fall outside the Employee Retirement Income Security Act (ERISA) guidelines and are exempt from the testing required with qualified retirement savings plans.

To be clear, the popular 401(k) and 403(b) plans are both qualified. They aren’t considered non-qualified plans, so the information on this page won’t apply to those plans.

A non-qualified plan is meant to meet specialized needs for certain employees, mainly key executives, and act as a tool for their recruitment and retention.

Pay Your People Confidently.

BambooHR makes running your payroll easy, quick, and stress-free.

Learn More Today!

What Are the Types of Non-Qualified Plans?

The types of non-qualified plans include:

Which Employees Are Eligible for Non-Qualified Plans?

The employees who are eligible for non-qualified plans are typically executives and other key employees. This is because non-qualified plans are designed to meet their specific needs as high earners—and to provide extra incentive to keep them at a particular company.

One exception to the executive rule involves deferred-compensation plans which teachers or other specific seasonal workers may also fall under. But instead of deferring part of their income into retirement as in a standard plan, teachers may defer a portion of their income throughout the school year so that they continue to get paid at the same rate in the summer months when they’re not working.

Employers may also find it valuable to offer non-qualified plans to high-earning independent contractors. By deferring some of their pay into retirement, the employer doesn’t have to play the entire salary immediately.

How Are Taxes Calculated on Non-Qualified Plans?

Taxes for non-qualified plans are actually split between when the money is earned and when it is paid out.

FICA taxes, which are comprised of Medicare and Social Security tax payments, are taken out of the employee’s paycheck when they earn it, as most taxes are.

However, the bulk of the federal income tax withholding for non-qualified plans is not calculated or withheld until the money is actually paid out. Since it’s going to be calculated based on future tax rates (sometimes decades in the future, if the employee is far from retirement), there’s no real way to predict what those taxes will look like.

This can potentially benefit the employee, as many individuals will find themselves in a lower tax bracket during retirement than while they’re still working.

Other Important Tax Information About Non-Qualified Plans

Here are some things employers need to know about the taxes involved, especially when it comes to non-qualified deferred-compensation plans:

  1. The plans are funded using after-tax dollars.
  2. Employers can’t claim their contributions as a tax deduction (in most cases).
  3. For income tax withholding purposes, distributions are considered supplemental wages.
  4. Employers are required to apply federal tax withholding rules on up to $1 million worth of supplemental wages, at a rate of 25%. For supplemental wages exceeding $1 million, the rate is 35%.
  5. On an employee’s W-2 form, reported distributions from a non-qualified plan are reported in box 11.

How Can Non-Qualified Plans Benefit Employers?

Non-qualified plans benefit employers in a number of ways: