Nonqualified Retirement Plans: Overview, Types, Pros & Cons

By Kailey Hagen – Updated May 2, 2025 at 11:31 PM

Key Points

Nonqualified plans allow highly compensated employees to save beyond qualified plan limits.
Earnings in most nonqualified plans are tax-deferred until withdrawal.
These plans are not protected from company creditors in bankruptcy.

Nonqualified retirement plans are employer-sponsored retirement plans that aren’t subject to the rules laid out in the Employee Retirement Income Security Act of 1974 (ERISA). The law created standards for plan participation, funding, and reporting. Nonqualified retirement plans are distinct from the more common qualified retirement plans, such as 401(k)s, which are subject to ERISA rules.

You usually find nonqualified retirement plans among executives and other highly paid employees who have special needs that a qualified plan can’t meet. Here's a closer look at how nonqualified plans work.

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An infographic listing the four types of nonqualified retirement plans. — Image source: The Motley Fool.

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Split-dollar life insurance plans

The employer pays for permanent life insurance for the employee, and the employee and employer agree upon how to split the policy. Both employee and employer may split the cost of the premiums. Upon the employee’s death, the employer may recoup an amount equal to what it put into the plan. The employee’s beneficiaries would claim the rest.

Group carve-out plans

Group carve-out plans replace group term life insurance coverage of more than $50,000 with an individual universal life insurance policy. The plans provide extra coverage to help the employee avoid taxes on group life insurance over $50,000.

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Did You Know...

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About the Author

Kailey Hagen, CFP, is a contributing Motley Fool retirement analyst covering Social Security, Medicare, and retirement planning. Before The Motley Fool, Kailey was a research analyst for Reviews.com focusing on credit and banking products. She is a Certified Financial Planner® and holds a bachelor’s degree in English from the University of Wisconsin-Madison.

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