which of the following statements comparing qualified defined contribution plans and nonqualified deferred compensation plans is false?
a. employers must fund qualified defined contribution plans but not nonqualifed deferred compensation plans.
b. qualifed defined contribution plans are subject
The correct answer and explanation is:
The correct answer is b. Qualified defined contribution plans are subject to fewer regulatory requirements than nonqualified deferred compensation plans. This statement is false.
Explanation:
- Qualified defined contribution plans and nonqualified deferred compensation plans are both retirement plans, but they have distinct regulatory and tax treatments.
Qualified Defined Contribution Plans:
- These plans are governed by the Employee Retirement Income Security Act (ERISA) and must meet specific requirements under Internal Revenue Code (IRC) Section 401(a) to receive favorable tax treatment.
- Employers are required to fund these plans by making contributions, which are usually tax-deductible.
- Employees do not pay taxes on the contributions or earnings until they withdraw funds from the plan.
- These plans have strict rules regarding contribution limits, vesting schedules, and eligibility, all designed to protect the employees’ interests.
- Common examples include 401(k) and 403(b) plans.
Nonqualified Deferred Compensation Plans:
- These plans are not subject to the same stringent regulatory requirements as qualified plans and do not enjoy the same tax advantages.
- Employers are not required to fund these plans in advance, and employees are taxed on the deferred income when they receive it.
- Nonqualified deferred compensation plans allow companies to offer more flexibility, particularly for key executives or highly compensated employees. However, these plans do not receive the same legal protections as qualified plans and may be subject to risk if the employer goes bankrupt.
- These plans are often used as an incentive or retention tool.
Key Differences:
- Funding: Employers must fund qualified plans, but they are not required to fund nonqualified plans.
- Tax Treatment: Qualified plans enjoy tax-deferral benefits for both employers and employees, whereas nonqualified plans are taxed when the income is received.
- Regulatory Oversight: Qualified plans are subject to more regulatory oversight, including contribution limits, discrimination testing, and mandatory vesting. Nonqualified plans are more flexible but lack many protections, such as funding requirements and anti-discrimination rules.
So, the false statement is that qualified plans are subject to fewer regulatory requirements than nonqualified plans. In fact, qualified plans are subject to more regulatory oversight.