The CEO maxes out her 401(k) at $24,500. That is barely 3% of her $800,000 salary. Non-qualified deferred compensation fills the gap, but the money sits on the employer's balance sheet, exposed to creditors.
Qualified plans have limits. A 401(k) deferral of $24,500 replaces less than 5% of a $500,000 salary. Non-qualified plans fill this gap. No nondiscrimination testing, no contribution caps, no coverage requirements. Employee Retirement Income Security Act (ERISA) is the 1974 worker-protection statute that mandates vesting, funding, fiduciary duties, and creditor-segregated assets for rank-and-file retirement plans; PBGC is the federal insurer that backstops defined-benefit pensions when sponsors fail.
HIGH-FREQUENCY: These two doctrines explain every structural feature of non-qualified plans.
Constructive receipt: income is taxable when made available without substantial restrictions. If the executive can take the money anytime but chooses not to, the IRS taxes it now. Non-qualified plans must prevent current access.
Economic benefit doctrine: if assets are set aside exclusively for the executive and beyond creditor reach, the executive has received a current economic benefit, taxable immediately.
Common mistakes
- Reversing rabbi and secular trust tax treatment. Rabbi trust: creditor-exposed = deferral preserved. Secular trust: creditor-protected = taxed now. If the exam describes assets "beyond creditor reach," the answer is immediate taxation, every time. Trap: "no current income" for a creditor-protected trust.
- Confusing governmental and non-governmental 457(b). Government: trust-protected, IRA-rollable. Non-government (hospital, charity): employer's general assets, no rollover. Trap: a hospital employee rolling a 457(b) to an IRA.
- Forgetting 457(f) is taxed at vesting, not distribution. A benefit that vests in December but pays in February is income in the vesting year. Trap: zero income in the vesting year because no cash was received.
Bottom line
- No contribution limits, no nondiscrimination testing, no ERISA protection: participants are unsecured creditors.
- Rabbi trust: assets exposed to creditors, deferral preserved. Secular trust: assets protected from creditors, taxed immediately.
- Section 409A: elections before the year, distributions limited to 6 events, no acceleration. Violation = 20% penalty plus interest.
- Non-governmental 457(b): creditor risk, no IRA rollover, independent limits. 457(f): no contribution limit, taxed at vesting.
Exam shortcut
"DEFERRAL = DANGER." If the plan defers tax, the assets are exposed (rabbi trust). If assets are safe, you pay tax now (secular trust). 409A "BET": Before the year (elections), Events only six (distributions), Terminate acceleration. Golden parachute: "3 opens the gate, 1 sets the floor." 457 decision tree: Government = trust + rollover. Tax-exempt = creditor risk + no rollover. Exceeds $24,500 = 457(f), taxed at vesting.
The full lesson (about 2,371 words, 16 min read) adds 2 worked examples, all 5 common mistakes, a self-check, free in the app.
Learning objectives
- F.49
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