Qualified vs. Non-Qualified Retirement Plans: What is the Difference?

Oftentimes, the moment you hear that a government agency is involved in something, your confidence in it usually goes up. You may find the tag of rules and regulations reassuring and take solace in the fact that someone is overseeing things. When it comes to retirement plans, government involvement comes from the Internal Revenue Code (IRC) and the Employee Retirement Income Security Act (ERISA). These two bodies establish the rules for certain types of retirement plans, also known as qualified retirement accounts.

But just because some retirement plans follow these government rules does not automatically mean the others are bad. Non-qualified retirement accounts, which do not follow ERISA or IRC standards, can be widely popular and useful, depending on your financial goals.

In the debate between qualified vs non-qualified accounts, who wins? Honestly, it depends on what you need. Let’s find out more about the differences between these two types so you can arrive at a more informed and comprehensive decision.

What is a qualified retirement plan?

A qualified retirement plan is an employer-sponsored plan that meets specific guidelines set by the IRC, particularly Sections 401(a) and 403(a), and must follow the rules outlined in ERISA. These plans qualify for special tax treatment and legal protections because they comply with federal standards.

There are two main types of qualified plans – defined contribution and defined benefit. A defined contribution plan lets you contribute a set amount of your paycheck into the plan, such as in the case of a 401(k). You are in control of how the money is invested, and whatever amount you accumulate is yours to keep and use. This includes contributions and earnings. On the other hand, a defined benefit plan is funded and managed by your employer. The employer promises to pay you a fixed amount during retirement, based on factors like your salary and years of service. These plans are also known as pension plans. However, traditional pension plans are not so common these days, and only a few employers offer them. 401(k)s, on the other hand, as you may already know, are quite widely offered and used.

Qualified retirement plans must meet certain criteria. For instance, these plans have to pass a non-discrimination test to ensure that their benefits are not skewed in favor of higher-paid employees or company executives. Vesting is another key feature of these plans, according to which, after working a certain number of years, the employee’s right to the employer’s contributions becomes nonforfeitable. These plans must also provide access to documents, and a certain percentage of employees in an organization must be covered for these plans to remain compliant.

Qualified retirement plans are eligible for several tax benefits, too. Contributions to these plans are made pre-tax. As a result, your taxable income is lowered for the year the contribution is made. In addition, any profits that your investments earn within the account are tax-deferred, so you do not have to pay any taxes until you withdraw the money. However, some plans, such as Roth 401(k)s, may be an exception here. Roth 401(k)s allow after-tax contributions and offer tax-free withdrawals in retirement if certain conditions are met.

Qualified retirement plans may also offer matching employer contributions. These employer matches are tax-deferred until you withdraw them. The most common types of qualified plans include 401(k) plans, pensions, Employee Stock Ownership Plans (ESOPs), and Keogh (H.R. 10) plans, which are typically used by self-employed individuals or small business owners.

Qualified plans have strict rules about withdrawals. It is important to abide by these to ensure you do not get stuck in the loop of taxes and penalties. Generally, you cannot withdraw funds from these accounts before the age of 59½ without facing a 10% early withdrawal penalty. But if you qualify for a hardship exemption, you can evade these. Here are some situations in which hardship withdrawals are allowed:

If you incur healthcare-related expenses
If you need to cover the costs of purchasing or repairing a principal residence
If you need to pay for funeral expenses
If you incur post-secondary education expenses
If you have to pay for preventing eviction or foreclosure of your primary residence

Additionally, as of 2025, you need to begin taking Required Minimum Distributions (RMDs) from your plan once you reach age 73. These withdrawals are taxed as ordinary income, and failure to withdraw the required minimum amount also results in penalties.

What is a non-qualified retirement plan?

The biggest and simplest difference between qualified and non-qualified accounts is that while the former follows strict government rules and comes with specific tax advantages, the latter plays by a different set of rules. Non-qualified plans do not fall under ERISA and are not required to meet the same federal guidelines that govern qualified retirement plans. With non-qualified plans, taxes are paid before any contributions are made. Hence, your contributions are from your after-tax income, and employers cannot claim these contributions as tax-deductible. Unlike 401(k)s or Individual Retirement Accounts (IRAs), these plans do not offer tax breaks. However, depending on the structure, these plans may still offer tax-deferred growth or diverse payout options at retirement. Some examples of non-qualified retirement accounts include the split-dollar plan, executive bonus plan, deferred compensation plan, and group carve-out plan.

Non-qualified retirement plans do not have IRS-imposed contribution limits. With a 401(k), for example, you are limited to contributing $23,500 annually as of 2025 if you are under 50, $31,000 if you are over 50, and $34,750 if you are aged 60 to 63. But with a non-qualified plan, both the employee and employer can decide to contribute much larger amounts. This is why these plans are used mainly by high-income group employees who want to go beyond those standard limits and invest more per annum. That said, these plans are not for everyone. The eligibility is typically limited and is entirely determined by the employer. They are often offered to executives or senior management as part of a deferred compensation arrangement or a Supplemental Executive Retirement Plan (SERP). The taxes on contributions and earnings are typically deferred until the funds are actually paid out. So, while the contributions are made with after-tax dollars, you do not pay taxes on the investment growth or the full amount until you start receiving the payments, which is usually in retirement.

It is important to note that since non-qualified retirement plans are not protected under ERISA, if the company goes bankrupt, the funds could be seized by creditors. Hence, these plans may be relatively less secure than qualified retirement plans, which are legally protected.

Qualified vs non-qualified retirement plans – The big face off

Now it is hard to pinpoint the better option between the two. So, it is better to go through the pros and cons of both these plans and decide what works for you.

Pros of qualified retirement plans

Legal protection against creditors: One of the biggest advantages of qualified plans is that the money in your retirement account is protected from creditors. Creditors generally can’t touch the funds in a qualified plan. So even when things go south, you can take relief in the fact that your retirement savings are secure. This legal protection can also offer other strategic benefits. For example, if you are going through a financial crisis, you may be able to borrow from your plan through a 401(k) loan. And if you leave the funds untouched, they continue to grow tax-deferred, which helps you stay financially afloat now while still securing your retirement down the line.
Tax benefits to boost your growth: Let’s talk about taxes, or rather, how these plans help you avoid them, at least in the present. With a qualified retirement plan, your contributions are usually made pre-tax, which lowers your taxable income for the year. So, you get to save money now. The real cherry on top is that your investments grow tax-deferred, and you do not pay any tax on the gains until you actually start taking the money out in retirement. Why does this matter? Because years of untaxed growth, along with compounding, is a formula for better returns. And if you end up in a lower tax bracket in retirement, which many people do, you will pay relatively less tax when you finally start withdrawing your funds.
Employer contributions = free money: One of the best perks of a qualified plan like a 401(k) is the potential for employer matching contributions. Your employer may match a portion of what you contribute. The more you contribute and the more your employer matches, the faster your retirement account grows. Isn’t this a sweet deal?

Cons of qualified retirement plans

Contribution limits: One of the most noticeable limitations of qualified plans is the annual contribution cap. If you have had a high-income year or have extra money that you would like to invest towards retirement, you would not be able to as you can’t exceed the IRS-imposed annual limit. So, if you are a high earner, you may miss opportunities to grow wealth in a tax-advantaged way.
Limited investment choices: Another downside of these plans is that you are often stuck with the investment options your employer’s plan provides. Your portfolio might be limited to a short list of options. This can be a significant drawback and restrict your investment freedom.
Tied to your employer: Most qualified retirement plans are employer-sponsored, which links your plan directly to where you work. Things can get messy when you change jobs. You will have to decide whether to leave the funds behind, roll them into a new plan, or move them to an IRA. Also, your employer controls the match and other plan rules, like vesting schedules and loan provisions. If you are working for a company that does not offer suitable provisions, it may make things difficult.

Pros of non-qualified retirement plans

Higher contribution limits: Non-qualified plans do not have IRS-imposed contribution limits. If you are already maxing out your 401(k) and still want to save more, a non-qualified plan can save the day! These plans are ideal for senior executives or high-income earners who have more funds to invest than the average individual.
Greater flexibility and customization: Non-qualified plans can also be more flexible and tailored to your situation. These plans are designed with specific goals in mind and can support complex financial needs.
Helpful for employee retention and satisfaction: From the employer’s point of view, offering a non-qualified plan can be helpful for employee retention. And, for employees, it can feel rewarding and motivating to be offered something above and beyond the standard 401(k).

Cons of non-qualified retirement plans

Lack of ERISA protection: Unlike their qualified counterparts, non-qualified retirement plans do not fall under ERISA regulations. So, the legal protections you would normally expect, like safeguards from creditors, do not apply to these accounts. It is a risk you have to accept when participating in these types of plans.
No employer match: You usually will not get any matching contributions from your employer. With a 401(k), employer matches can significantly boost your savings over time. In non-qualified plans, that benefit is off the table.
Not designed for everyone: Non-qualified plans are not universally accessible, and they are not meant to be. They are usually offered only to senior-level employees and high earners. If you are in a lower income bracket or just starting your career, these plans will likely be off your radar. They may also be slightly more complex. If you are not working with a financial advisor, navigating the rules and tax implications can get tricky.

Qualified vs non-qualified retirement accounts – What should you finally choose?

If you are like most people, you will likely have access to a qualified retirement plan, typically a 401(k), through your workplace. If that is the case, do not ignore it. Seriously, make the most of it while you have it! The tax benefits and legal protections under ERISA that come with qualified plans enable tax-deferred growth over the years, lower taxable income today, and protect your money from creditors. Plus, even if your job changes, that money is still yours. So, contribute as much as you can, especially enough to get any employer match.

Now, as you move ahead in your career and earn more, you might be offered access to a non-qualified retirement plan. If that happens to you, Bravo! These plans are often reserved for the crème de la crème employees, and if you are being offered one, it likely means your company values you. Non-qualified plans allow you to save more. There are risks, yes, and these plans are not protected by ERISA. But they also offer flexibility and higher contribution potential, which can be a big win in the long run.

So, start with your qualified plan and maximize it. And when the time comes and you are eligible for a non-qualified plan, consider it as an added benefit. Use both if you can. But, of course, before you make any final moves, talk to a financial advisor and understand the pros and cons based on your specific situation. Use our free advisor match tool to get matched with 2 to 3 vetted financial advisors based on your financial requirements.

For further information on creating a suitable retirement plan for your unique financial requirements, visit Dash Investments or email me directly at dash@dashinvestments.com.

About Dash Investments

Dash Investments is privately owned by Jonathan Dash and is an independent investment advisory firm, managing private client accounts for individuals and families across America. As a Registered Investment Advisor (RIA) firm with the SEC, they are fiduciaries who put clients’ interests ahead of everything else.

Dash Investments offers a full range of investment advisory and financial services, which are tailored to each client’s unique needs providing institutional-caliber money management services that are based upon a solid, proven research approach. Additionally, each client receives comprehensive financial planning to ensure they are moving toward their financial goals.

CEO & Chief Investment Officer Jonathan Dash has been covered in major business publications such as Barron’s, The Wall Street Journal, and The New York Times as a leader in the investment industry with a track record of creating value for his firm’s clients.