Life & Health Insurance Exam (National Portion)Life InsuranceHard
A business owner sets up a non-qualified deferred compensation plan for key executives. Which of the following statements is TRUE regarding this type of plan?
- AThe plan is subject to ERISA's stringent reporting and disclosure requirements.
- BThe plan must be offered to all employees on a non-discriminatory basis.
- CContributions are tax-deductible for the employer at the time they are made.
- DBenefits are typically subject to a substantial risk of forfeiture.
Show answer & explanationAnswer & explanation
Correct answer: D. Benefits are typically subject to a substantial risk of forfeiture.
Non-qualified deferred compensation plans are not subject to ERISA's non-discrimination rules and are often designed with a 'substantial risk of forfeiture' to delay taxation for the executive. Contributions are generally not tax-deductible for the employer until the employee receives the benefit.
Why the other options are wrong
- A. Non-qualified plans are exempt from most ERISA requirements, including stringent reporting and disclosure, as they are typically for a select group of management or highly compensated employees.
- B. Non-qualified plans are specifically designed to be discriminatory, typically offered only to a select group of key executives, unlike qualified plans.
- C. Employer contributions to non-qualified plans are generally not tax-deductible until the employee receives the benefit, at which point it becomes taxable to the employee.
Non-Qualified Deferred Compensation Plan
An employer-sponsored retirement plan that does not meet ERISA requirements and is typically offered to a select group of highly compensated employees, often involving a substantial risk of forfeiture.
- Not subject to ERISA rules (e.g., non-discrimination).
- Benefits are taxable to the employee upon receipt.
- Employer deduction is deferred until benefits are paid.
- Often includes a substantial risk of forfeiture to delay employee taxation.
Memory trick: Non-Qualified: For the 'SELECT' few, with 'RISK' and 'TAX DELAY'.