A business implements a deferred compensation plan for a select group of executives. This plan is not subject to ERISA's stringent participation, vesting, and funding requirements. What type of plan is this?
- A401(k) Plan
- BSimplified Employee Pension (SEP)
- CDefined Benefit Plan
- DNon-Qualified Deferred Compensation Plan
Show answer & explanationAnswer & explanation
Correct answer: D. Non-Qualified Deferred Compensation Plan
Non-Qualified Deferred Compensation Plans are designed for a select group of management or highly compensated employees and are exempt from most ERISA requirements, including those regarding participation, vesting, and funding. This allows for greater flexibility but means they don't receive the same tax advantages as qualified plans.
Why the other options are wrong
- A. A 401(k) is a qualified plan subject to ERISA regulations.
- B. A SEP is a qualified plan subject to ERISA regulations.
- C. A Defined Benefit Plan is a qualified plan fully subject to ERISA regulations.
Non-Qualified Deferred Compensation Plan
A type of deferred compensation plan that does not meet the requirements of ERISA and is typically offered to a select group of management or highly compensated employees. These plans offer flexibility but do not receive the same tax benefits as qualified plans.
- Not subject to most ERISA rules (participation, vesting, funding).
- For a 'select group' of employees (e.g., executives).
- Contributions are not tax-deductible for employer until paid to employee.
- Employee defers income and tax until distribution.
Memory trick: ERISA compliance: Qualified plans follow all rules, Non-Qualified plans bend them for flexibility.