The favorable tax treatment accorded qualified plans is not without its price. Qualified retirement plans must satisfy strict and highly detailed standards concerning, among other things, which employees must be covered, which employees must "vest" in their employer-derived benefits, how benefits must accrue (in the case of a defined benefit plan) or be allocated among employees' accounts (in the case of a defined contribution plan), and how the employer must fund the plan. These rules are designed to prevent qualified plans from discriminating in favor of certain individuals known as "highly compensated employees."

In effect, the tax law offers employers an option: If an employer establishes a qualified plan providing broad-based coverage to its employees, the government will provide the employer and the employees with certain favorable income tax treatment. Congress, in enacting ERISA, was concerned that the decision of whether to provide a retirement plan being voluntary for the employer. The legal and regulatory system is designed to do this, while providing incentives to employers that help provide retirement benefits to their employees. Nothing, however, compels an employer to adopt a retirement plan for its employees. The only "mandatory" pension contributions called for under current law come in the form of the employer's required contributions to pay for Social Security benefits.

Congress, in passing ERISA, balanced a number of policy considerations. Key among these was the goal that the qualification rules not be so stringent so as to render the cost of maintaining a qualified plan prohibitive. In considering the specific qualification requirements, it is often helpful to refer to the underlying policies that Congress was attempting to effectuate. However, the law in this area has become increasingly complex. As a result, compliance costs have increased, and many employers have switched from more complicated costly plans to less costly and simpler defined contribution plans. Others have switched from individually designed plans to model or prototype plans offered by a variety of sponsors, such as banks, financial institutions, and benefits consulting firms.

But many employers find nonqualified plans better suited to their needs. If an employer wishes to provide retirement benefits to its rank-and-file employees, the tax qualification requirements may not prove especially onerous. Where this is not the case, however, the employer may find that the benefits of tax qualification are outweighed by their related compliance cost. In contrast to a qualified plan, a nonqualified plan can be designed to limit benefits to those employees that the employer selects and in the amounts that the employer chooses.

Sometimes, some combinations of qualified and nonqualified arrangements will best suit an employer's needs. Nonqualified arrangements typically are used to provide benefits to an employer's top executive and other highly compensated employee that, due to the requirements imposed by the Code, cannot be provided under a qualified plan in a cost-effective manner.