"Non-qualified" refers to benefits that do not directly qualify for preferential tax treatment. Qualified plans, such as pensions and 401(k) s, "qualify" for tax-deductible funding, tax-deferred earnings on plan assets, and protection for employees under the Employee Retirement Income Security Act (ERISA). They must be offered to nearly all employees at a company. Because of this and other restrictions on qualified plans, many executives will need supplemental non-qualified benefits to ensure that their retirement income will be in proportion to their final compensation.

For two decades the government has been tightening the limits on qualified plans as a way to raise tax revenue. Tax laws limit the benefits available from qualified pension plans, contributions that can be made to profit sharing and 401(k) plans, and the amount of compensation considered in calculating benefits or contributions. The Omnibus Budget Reconciliation Act of 1993 (OBRA ‘93) cut this considered compensation limit from $235,840 to $150,000 in 1994; it is $210,000 in 2005.

In 1987 the Booke & Company pension report concluded that married executives need to replace approximately 75 percent of final pay with retirement income in order to maintain their standard of living. Executives participating in typical qualified plans may be counting on these to provide most of their retirement income — 50 percent or 60 percent of final pay, with the balance coming from company stock, IRA's, personal savings, and other investments. Often, however, they discover that their traditional retirement plans will only generate a 20 percent to 45 percent replacement rate.

For successful executives the limits result in reverse discrimination — they will receive less retirement income from qualified plans, as a percentage of final pay, than other employees. For example, a 50 year-old executive earning $150,000 salary who participates in typical qualified pension and 401(k) plans could retire with a total income replacement of 47 percent — 4 percent from Social Security, 27 percent from pension, and 16 percent from a 401(k) plan. On the other hand, a 50 year-old rank & file employee earning $25,000 and participating in the same plans, could retire with total income replacement close to 100 percent.

Not just the corporation's most highly paid executives will feel the impact of qualified plan limits. With the lower limit on considered compensation, companies will see an immediate increase in the number of mid-level executives whose qualified benefits will fall short of adequate retirement income. In fact, many middle-aged executives earning at least $75,000 a year will need non-qualified plans to ensure adequate retirement income. While the $210,000 compensation cap will index for inflation (in $10,000 increments), many executives will have annual salary increases well above this rate. It will thus take fewer years for more executives to exceed the cap. Non-qualified plans, which are not restricted by government regulations, can solve an employer's executive benefit dilemma.