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The Divorce Encyclopedia
Nonqualified Plan


Term Definition Nonqualified Plan - an employment or retirement plan not regulated by ERISA, including many deferred pay plans such as ESOPs, stock options and other future-based compensation plans.
Application in Divorce Nonqualified plans are best understood negatively. They are not protected by the Pension Benefit Guarantee Corp. (PBGC), which protects employees covered by underfunded pensions when the company fails. They are not regulated by ERISA, which is the Employment Retirement Income Security Act, a federal law governing private sector employee benefits, including vesting and the administration of certain qualifying retirement plans. And in a divorce, nonqualified plans cannot be distributed via a Qualified Domestic Relations Order (QDRO).

ERISA, which became law in 1974, came into being so that workers would achieve a progressively larger vested interest in their pension plans during their working years. By comparison, deferred plans such as ESOPs, stock options and other future-based compensation tie the value of the plan to the performance of the company. In general, nonqualified plans are what have been described as "future-based, merit-oriented, employer-optional, compensation plans."

This is not to imply that nonqualified plans are substandard; rather it is to establish that the employee has neither the benefits nor the protection associated with a qualified plan. For example, stock options, which are granted with a vesting date in the future, carry an option price. The option price is generally above the market price at the time the option is granted. If the market price of the stock does not rise above the strike price, the option is worthless. The value of the option is conditional, in the future, and not guaranteed.

In the event of layoff, or forced early retirement, nonqualified plans may not have the protections of qualified plans.

During a marriage, a couple, depending upon their career tracks, may have accumulated benefits under both qualified and nonqualified plans; care, therefore, should be taken if their plans become property subject to distribution in a divorce. In a divorce, nonqualified plans may be distributed via a Domestic Relations Order (DRO), which is a separate action from distribution view a QDRO.

See also ERISA, PBGC, QDRO, DRO.

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