What is the primary characteristic of nonqualified plans?

The primary characteristic of nonqualified plans is that they are not eligible for favorable tax treatment. Unlike qualified plans, which must adhere to specific IRS guidelines to provide tax advantages such as tax deferrals for contributions and growth, nonqualified plans do not meet these requirements. As a result, contributions to nonqualified plans are made with after-tax dollars and do not receive the same tax benefits during the accumulation phase. Furthermore, participants in nonqualified plans may be taxed on the benefits when they are received, rather than enjoying any tax deferral.

This distinction is crucial for understanding how different retirement and benefit plans operate, particularly in terms of tax liabilities and employee eligibility. Nonqualified plans can serve particular organizational needs, such as providing additional retirement benefits to select employees without the restrictions placed on qualified plans.