Most people call qualified plans pensions. Employers contribute to the plan while the employee still works for them. Employees sometimes contribute to these plans, too. A 401(k) is a perfect example of a qualified plan.
A non-qualified deferred compensation plan, on the other hand, is not paid into at the time of the person’s employment. Instead, the money is deferred, or placed in a permanent trust. The employee is then promised by their employer to receive the funds at a later date. Until the time the funds are paid, they are considered an asset of the business and can be used for commercial reasons.
Differences Between Defined Benefit Plan and Non-Qualified Compensation Plan
When an employee will receive the funds in a compensation plan is just one difference between the two types of plans. There are others, as well. Important considerations of a defined, or qualified, plan are as follows:
- They are subject to the Employee Retirement Income Security Act (ERISA)
- Funds contributed are not taxed
- They can be rolled into an IRA for continuous tax deferral
- Protected by insurance
- The plan has a trustee
Important things to know about non-qualified compensation plans include:
- They are not subject to ERISA
- They cannot be rolled into an IRA and may be subject to taxation when received
- There is no trustee for the plan
- The plan is a debt owed to the employee
- Insurance does not protect the planned benefit
Although the two different types of plans have many differences, one thing remains the same for both of them. They may both be subject to property division during divorce.
How are Non-Qualified Deferred Compensation Plans Divided in Divorce?
Some non-qualified deferred compensation plans are subject to property division during divorce. There are times, though, when these plans do not allow for division. In these instances, the couple must consider how the funds will be divided in the future, if and when the distributions from the plan are made.
When dividing an amount to be distributed in the future, the marital portion must be calculated. Provisions must also be made for the changes in value between the divorce settlement date and the date of the payout. These considerations become even more important if the compensation plan is not going to be paid for many years.
In most cases, the two spouses involved in the divorce reach an agreement. In this agreement, one spouse is given other property in exchange for relinquishing their right to the pension. For example, the spouse with the pension may offer to allow their spouse to keep the marital home. They, in turn, will keep their entire pension. This is usually the simplest way to do it and sometimes, the simplest solution is the best one.
Our Divorce Lawyers in Charleston Can Help with Complex Property Division
Property division issues always have the potential to become complex. At The Peck Law Firm, our Charleston divorce lawyers can provide the sound legal advice you need and overcome any challenges that arise. Contact us today at (843) 631-7117 or contact us online to schedule a consultation.