In simple terms, a qualified retirement plan is one that meets the Employment Retirement Income Security Act of 1974 (ERISA) guidelines, while a nonqualified retirement plan falls outside of ERISA guidelines but is subject to compliance with IRS Code Section 409A.
| 401(k) vs DCP | 401(k) | DCP |
|---|---|---|
| No Limitations of Pretax Contributions | X1 | ✔2 |
| Ability to Access Account Prior to Age 59½ without Penalty | X | ✔ |
| Ability to Re-Defer Once Elections Have Been Made | X | ✔ |
| Ability to Asset Allocate Accounts Differently Based on Payout Path | X | ✔ |
| Ability to Make Company Contributions without Limit | X | ✔ |
| Ability to Defer RSUs and PSUs | X | ✔ |
| Tax-Deferred Growth | ✔ | ✔ |
| Flexible Distribution Options at Retirement | ✔ | ✔ |
| Variety of Investment Fund Options | ✔ | ✔ |
| Hardship Distributions | ✔ | ✔ |
| Plan Assets Protected from Change of Control and Change of Heart | ✔ | ✔ |
| Ability to Maintain Account Balance After Termination | ✔ | ✔ |
| Loans from Plan | ✔3 | X |
| Plan Assets Protected from Company Insolvency | ✔ | X |
For illustrative purposes only. Actual results may vary.
1$23,000 is the maximum contribution which may be further reduced due to discrimination testing; employees over the age of 50 are allowed a $7,500 catch-up contribution.
2100% of total compensation can be deferred into the plan less deductions for benefits and FICA.
3An employee can borrow up to 50% of their vested account balance up to a maximum of $50,000.
Nonqualified deferred compensation plans must follow the guidelines of Internal Revenue Code Section 409A. This tax code section covers the timing of nonqualified plan elections, funding, distributions and documentary compliance requirements. Please consult with the appropriate professional regarding your individual circumstance.
Deferred Compensation Plan
DCP as a Supplement for 401(k)
Note: An executive earning $500K must contribute the maximum 401(k) amount of $23,000 (i.e. 4.6% of compensation) with the remaining 12.4% required deferral into a DCP to meet an 80% targeted retirement income replacement. An executive earning $500K contributing the maximum 401(k) amount will only replace 21.4% income in retirement.
| Financial Assumptions | |
|---|---|
| Age | 45 |
| # of Deferrals | 20 |
| Retirement Age | 65 |
| Earnings Rate | 8% |
| # of Payouts | 20 |
| Maximum 401(k) Deferrals | $23,000 |
| Income Replacement Target | 80% of Compensation |
| Required Deferral | 17% of Compensation |
For illustrative purposes only. Actual results may vary.
DCP as a Supplement for 401(k)
Deferred Compensation Plan
Additional Deferral Opportunity
401(k) Limitations*
Potential limits due to discrimination testing
For illustrative purposes only. Actual results may vary.
*$23,000 is the maximum contribution
Note: The maximum 401(k) contribution level does not include the $7,500 catch-up contribution allowed for employees aged 50 or older.