Qualified Retirement Plan
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Types of Plans

BENEFITS
For employers, a qualified retirement plan is one of the best tax shelters available, allowing a current tax deduction for contributions to the plan.

For employees, pre-tax contributions made to a qualified retirement plan reduce the employee's taxable wages. Earnings from plan investments accumulate tax deferred and distributions from the plan may be rolled-over tax-deferred to another qualified plan or IRA.

Benefits of qualified retirement plans include:
  • Tax Sheltered Accumulation of contributions and earnings from plan investments for retirement.
  • Special tax treatment for all types of business entities that sponsor a qualified retirement plan.
  • Helping employers attract and maintain a quality workforce, reducing employee turnover, and increasing employee incentives.
  • Allowing owners to maximize their contributions using different allocation formulas in certain cross-tested & age-weighted profit sharing plans such as Comparability Plans and Age-Weighted Plans
  • Allowing owners to make tax-deductible contributions to the plan rather than receive taxable earnings or dividend profits.
  • Permitting working owners of a closely-held corporation and self-employed individuals to accumulate greater sums through tax-deferred build up in the plan account due to long term service.
  • Establishing a market for the corporate business owner's shares of stock in a closely held corporation. (ESOP)
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TAX ADVANTAGES
The following tax advantages are applicable to all types of qualified plans, commonly known as special tax treatment:
  • The amount of the contribution is deductible to the company.
  • If the plan is a 401(k), employee deferrals are not taxed to the employee, until benefits are paid to the participant.
  • Employers can deduct plan expenses they pay directly.
  • Investment earnings on plan investments are generally exempt from Federal and State income tax until paid to a participant.
  • Participants in the plan incur no current income tax liability for deferred benefits.
  • Plan distributions may be rolled over to an Individual Retirement Account (IRA) or other qualified plan which will defer income tax until withdrawn from the IRA. Distributions from an IRA must commence at age 70.5.
  • Social Security ignores compensation above the Taxable Wage Base ($113,700 for 2013) for calculating benefits. An integrated plan can provide an additional "make-up" contribution for participants that earn more than the taxable wage base.
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HOW MUCH CAN THE PLAN SPONSOR CONTRIBUTE AND DEDUCT FOR FEDERAL INCOME TAX PURPOSES?
The amount deductible to the employer depends on the type of plan:
  • Profit Sharing Plan: the sponsor may deduct up to 25% of eligible payroll. This no longer includes employee contributions to a 401(k) plan.
  • Money Purchase Plan: the sponsor may deduct up to 25% of eligible payroll
  • Combination Money Purchase and Profit Sharing Plan: the sponsor may deduct up to 25% of eligible payroll
  • Stand-alone Defined Benefit Plan: the sponsor may deduct the amount needed to satisfy minimum funding standards
  • The limit on the amount of compensation that can be considered by any one employee is $255,000 for 2013. (indexed for inflation)
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WHAT IS A QUALIFIED RETIREMENT PLAN
A plan that provides benefits to participants while affording special tax treatment to the plan sponsor and employees. Such plans must meet special requirements established by the Internal Revenue Service, commonly known as non-discrimination rules.

A Qualified Retirement Plan is established and maintained by an employer (known as the "plan sponsor") for the benefit of the employees. Owners may participate in the plan, but their contributions may be limited due to non-discrimination testing.

Employers make tax-deductible contributions to the plan, while employees can defer a portion of their pay to a 401(k) Plan. The deferred income accumulates tax-deferred until withdrawn by the participant. Owners may make tax-deductible contributions to the retirement plan rather than receiving taxable income.

There are two general types of retirement plans: Defined Contribution Plan overview:
  • An individual account is established for each participant.
  • Benefits are not guaranteed.
  • The value of a participant's benefit is based upon contributions, investment results, expenses and forfeitures.
  • The amount of the contribution is related to a participant, based upon compensation and/or age.
  • Distributions are generally restricted to retirement, death, disability, or termination of employment, but may be permitted for additional reasons depending on the plan.
Click here for information on various defined contribution plans.

Defined Benefit Plan overview:
  • The plan provides each participant a specified benefit at retirement age in the form of an annuity for life or an equivalent single cash payment
  • The benefit is definitely determinable and generally related to the participant's compensation and length of service (e.g. monthly pension for life equal to 50 percent of average monthly compensation)
  • There is no percentage or dollar limit on the amount of the contribution that is deductible, if the benefits are considered non-discriminatory.
  • Contributions to a defined benefit plan are calculated according to a formula set forth in the plan document.
  • Defined benefit plans are subject to minimum funding standards.
  • Excess earnings may offset the employer's funding requirements.
  • Contributions must be made to a trust fund established for the plan and are invested to provide benefits.
  • Distributions are received in either equal installments (annuity) or an equivalent cash lump-sum.

    Click here for information on defined benefit plans.

    Click here for information on Selecting Plans.

  • Why sponsor a plan? A typical individual will receive a small portion of their retirement income from Social Security, approximately 29% of their average lifetime wages as a retirement benefit. A typical American will require a 70% replacement ratio or more, so the difference will have to come from other sources such as personal savings or a company retirement plan.

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