Retirement plans which meet the Internal Revenue Code (IRC) and the Employer Retirement Income Security Act of 1974 (ERISA) requirements have certain special tax benefits, and these plans are known as “qualified retirement plans.”

When reviewing the retirement savings plans offered by an employer, a prospective employee may also notice that some plans offered are referred to as “nonqualified retirement plans.” This means that the plans in question do not meet the stringent rules set by the IRC and the ERISA, which means, furthermore, that they do not qualify for same tax benefits as qualified retirement plans do.

Should an employee be faced with choosing between a qualified or nonqualified plan there are crucial factors for the employee to examine carefully. Because nonqualified plans offer the employer a great deal of flexibility in application, nonqualified plans may offer higher total benefits. However, choosing a nonqualified retirement plan must be done with a certain amount of caution, because of the potential tax consequences.

Not only will the income generated by these plans be taxable, taxation on certain benefits may be immediate, even if those benefits are not received until retirement. This immediate taxation may represent a significant amount, so considering whether or not one can afford to pay taxes on future income is very important.