Florida 2-15 Life, Health and Variable Annuity AgentGeneral Knowledge of Life InsuranceHard
An employer offers a retirement plan where contributions are made with pre-tax dollars, earnings grow tax-deferred, and distributions are taxed as ordinary income in retirement. This plan is designed to primarily benefit highly compensated employees and allows for significant contribution limits. Which type of plan does this describe?
- A401(k) Plan
- B403(b) Plan
- CSimplified Employee Pension (SEP) IRA
- DNon-Qualified Deferred Compensation Plan
Show answer & explanationAnswer & explanation
Correct answer: D. Non-Qualified Deferred Compensation Plan
This describes a Non-Qualified Deferred Compensation (NQDC) plan. These plans are often used by employers to provide retirement benefits to highly compensated employees, allowing for significant deferrals without the strict IRS limits of qualified plans. They are not subject to ERISA and do not have to be offered to all employees.
Why the other options are wrong
- A. 401(k) plans are qualified plans, subject to ERISA, and must meet non-discrimination rules for all employees.
- B. 403(b) plans are for non-profit organizations and public school employees, and are qualified plans.
- C. SEP IRAs are qualified plans primarily for small businesses and self-employed individuals, with contribution limits tied to a percentage of compensation.
Non-Qualified Deferred Compensation (NQDC) Plan
A retirement plan that allows highly compensated employees to defer a significant portion of their income and bonuses until retirement, without being subject to ERISA's non-discrimination rules or strict contribution limits.
- Primarily for highly compensated employees.
- Not subject to ERISA (Employee Retirement Income Security Act).
- No strict contribution limits (unlike qualified plans).
- Distributions are taxable as ordinary income.
Memory trick: QUALIFIED means RULES for ALL, NON-QUAL means FLEX for FEW.