Some employers may want to provide certain employees with pension benefits while excluding other workers from those same benefits. The Employee Retirement Income Security Act (ERISA) prohibits this with certain retirement accounts. These accounts, called qualified retirement accounts, include 401k plans, Simplified Employee Pensions (SEP IRA), 403b plans and other employer-sponsored retirement accounts. Non-qualified accounts play by different rules, but you can still roll them over when you retire.
Non-qualified pensions are set up without meeting the requirements of ERISA. ERISA allows you to make pretax contributions to your retirement plan. ERISA also protects your pension plan savings from creditors by prohibiting transfers or assignments of benefits to another person or company. Examples of non-qualified pension schemes are non-qualified annuities and non-qualified deferred compensation plans.
You can roll over funds from a non-qualified plan to another retirement plan or to another investment account when you retire. You must sign a transfer request form with your employer, but you receive the full lump sum amount available from the employer's retirement plan that was set up for you. You may then take payments from the new account according to your needs. You can roll over annuities using a Section 1035 exchange. This is a tax-free exchange allowing you to set up a private annuity away from your employer's plan.
Not all non-qualified plans allow you a tax-free rollover. While you can roll over benefit amounts, you'll be taxed on non-qualified deferred compensation plans. Additionally, all contributions to non-qualified plans are made with after-tax dollars. Even though contributions are not taxed when withdrawn, all investment gains are taxed when you withdraw them. These benefits are far less than benefits from qualified plans, which allow pretax contributions and tax distributions, or allow after-tax contributions but distribute all savings tax-free.
Check with your plan sponsor or employer before taking a lump sum for a rollover. The plan sponsor can tell you what type of plan you have and whether you can roll this amount over tax-free. If you cannot, consider keeping the plan with your employer and just taking the pension payments when you retire. This will avoid paying a tax on the lump sum amount and instead allow you to spread out the tax over time. (see 1st reference, pg 11, 14, 15; 4th reference)
- IRS: Publication 575
- Department of Labor: FAQs About Pension Plans And ERISA
- IRS: Instructions for Forms 1099-R and 5498 - Main Contents
- U.S. Department of Labor. "Employee Retirement Income Security Act of 1974 (ERISA)." Accessed Aug. 9, 2020.
- U.S. Department of Labor. "FAQs about Retirement Plans and ERISA," Page 2. Accessed Aug. 9, 2020.
- Internal Revenue Service. "A Guide to Common Qualified Plan Requirements." Accessed Aug. 9, 2020.
- National Association of Plan Advisors. "A Shift in Focus for Non-Qualified Deferred Compensation Plans?" Accessed Aug. 9, 2020.
I am a Registered Financial Consultant with 6 years experience in the financial services industry. I am trained in the financial planning process, with an emphasis in life insurance and annuity contracts. I have written for Demand Studios since 2009.