Which statement about contrasting characteristics of qualified and nonqualified plans is not accurate?

Which statement about contrasting characteristics of qualified and nonqualified plans is not accurate?

• A. The ability to defer the employee's tax liability until actual receipt of the funds at retirement.
• B. The availability of rollover provisions to preserve tax deferral after a distribution.
• C. The requirement that the plan must benefit a specific percentage of nonhighly compensated employees.
• D. The timing of the tax deductibility of the employer's contribution to the plan.

Answer: (A)

Understanding how qualified and nonqualified plans treat taxes and participation helps explain why this statement isn’t accurate. Qualified plans are built around tax deferral as a central feature: employee contributions can be pre-tax, earnings grow without tax until distribution, and when you take money out in retirement you pay ordinary income tax. Rollovers from a qualified plan to another qualified plan or an IRA preserve that tax deferral. They also must meet nondiscrimination and minimum coverage rules, which typically require the plan to benefit a certain share of nonhighly compensated employees. Employers get a tax deduction for contributions in the year they are made. Nonqualified plans, on the other hand, don’t operate under those same rules. They aren’t required to pass nondiscrimination or coverage tests, and the timing of the employer’s deduction can be different (often tied to when the employee recognizes income or when benefits are paid). Importantly, tax deferral isn’t guaranteed until retirement in a nonqualified plan—the employee may incur taxes earlier, when the right to future benefits vests or when compensation is earned, depending on the plan’s funding and structure. That means the idea that the employee can defer tax liability until retirement is not an accurate characterisation for nonqualified plans. So the statement about deferral until retirement is not accurate in the comparison; the other points—rollovers preserving deferral in qualified plans, coverage requirements for qualified plans, and the timing of the employer’s tax deduction—are accurate contrasts.

Understanding how qualified and nonqualified plans treat taxes and participation helps explain why this statement isn’t accurate. Qualified plans are built around tax deferral as a central feature: employee contributions can be pre-tax, earnings grow without tax until distribution, and when you take money out in retirement you pay ordinary income tax. Rollovers from a qualified plan to another qualified plan or an IRA preserve that tax deferral. They also must meet nondiscrimination and minimum coverage rules, which typically require the plan to benefit a certain share of nonhighly compensated employees. Employers get a tax deduction for contributions in the year they are made.

Nonqualified plans, on the other hand, don’t operate under those same rules. They aren’t required to pass nondiscrimination or coverage tests, and the timing of the employer’s deduction can be different (often tied to when the employee recognizes income or when benefits are paid). Importantly, tax deferral isn’t guaranteed until retirement in a nonqualified plan—the employee may incur taxes earlier, when the right to future benefits vests or when compensation is earned, depending on the plan’s funding and structure. That means the idea that the employee can defer tax liability until retirement is not an accurate characterisation for nonqualified plans.

So the statement about deferral until retirement is not accurate in the comparison; the other points—rollovers preserving deferral in qualified plans, coverage requirements for qualified plans, and the timing of the employer’s tax deduction—are accurate contrasts.