Tax advantages for "qualified" retirement plan as contrasted with "non-qualified" plan

A "qualified retirement plan" or "qualified plan" is an employer-sponsored retirement-type program for employees that satisfies certain Internal Revenue Code requirements.

Under a nonqualified arrangement, the employer may not deduct its contributions until the employee's benefits are taxed. But, under a qualified plan, an employer may deduct its contributions in the year made, subject to certain limits and the participants are not taxed on their benefits until they are actually distributed - generally several years in the future - even if those benefits become completely nonforfeitable at some earlier date. Earnings from the investment of the assets of a qualified plan generally are not subject to tax until actually distributed. In contrast, the earnings on the assets of a nonqualified plan typically are subject to immediate income taxation.

To understand the difference, think in terms of the time value of money. In a nonqualified plan, the employer cannot deduct its contributions until the participant is taxed on the benefit. By permitting the employer to deduct contributions at the time they are made, a qualified plan generates tax savings and frees funds for the employer to invest. From the participant's view, the Internal Revenue Code provides favorable tax treatment to distributions from a qualified plan that may further reduce tax on a participant's benefits.