These plans are usually established for a select group of
executives to provide supplemental retirement benefits. Since the
plan is "non-qualified," it is not subject to the eligibility,
vesting, discrimination and funding rules of the "qualified" plans
described above.
Basically, a non-qualified plan is a promise by the employer to
pay a benefit to the executive in exchange for the completion of a
period of service.
The plan is unfunded, although the employer
may establish a trust or sinking fund to set aside assets to meet
the contingent liability. Since the plan is unfunded, the employer
receives no deduction, and the executive reports no income until
the promised benefit is actually paid. The executive is a general
creditor of the company to the extent that benefits have accrued,
but not been paid.