What Is the Real Cost of Covering Employees Under a Qualified Plan?

Business owners often bristle at the idea of putting in a qualified retirement plan because they must contribute on behalf of their employees. But what they don’t realize, is that with a properly designed qualified plan, the current tax savings alone may exceed the “cost” of covering those employees.

But let’s step back and explain, what is a Qualified Plan?

Qualified retirement plans provide employers with the unique opportunity to help their employees save for retirement. Qualified plans also give the business a tax break for the contributions they make for their employees. When the business is directly held, such as in an “S” corporation, you receive this tax break as the business owner. Some qualified plans allow employees to defer a portion of their salaries into the plan as well.

Now, what is the difference between a Qualified Plan and a Non-Qualified Plan?

Both qualified and non-qualified plans are employer-sponsored. The main difference is that a qualified retirement plan must meet ERISA guidelines and must be offered to all full-time employees. A non-qualified plan is typically offered to executives and key employees in the form of deferred-compensation, split dollar life insurance, and executive bonus plans.

Consider the following:

Our business owner is 54 and makes $280,000. There are five employees ranging in age from 26 to 45 with a total combined compensation of $207,500. The business has profits and is looking for ways to reduce her taxes.

A qualified plan design specialist was able to design a qualified plan where the business was able to contribute $66,375 to the retirement plan and the business owner would receive 84% of the plan contribution. Let’s look at how the cost of the plan breaks down:

Business Income Tax Rate: 35%
Plan Contribution: $66,375
Contribution for Business Owners $56,000
Contribution for Employees: $10,375
Tax Deduction on Plan Contribution: $23,231
Net After Tax Cost of Plan: $43,144
Savings to the Business after Cost of Employees: $12,856


In other words, if the business owner decides not to contribute to a qualified plan, there will be taxes due on the $66,375 totaling $23,231 leaving them with only $43,144. With the plan the business owner has $56,000 in their own qualified plan account – a $12,856 advantage.

Qualified plans have tax advantages. So, not having a qualified plan may cost more than having one.

Learn more about qualified plans.


Qualified plans are offered and administered independently of the companies of National Life Group.  This example is purely hypothetical and for illustrative purposes only. The example shown above does not represent the actual results of any particular plan.