Qualified Plans

Defined Benefit Plans

A defined benefit plan requires the employer, not the employee, to contribute to the plan and has a set benefit that will be paid to employees upon retirement. Unlike defined contribution plans, the participant is not required to make investment decisions. example: fully funded pension plan

Employee Stock Ownership Plans (ESOPS)

A qualified defined contribution plan in which benefits are give in the form of company stock Because the value of the stock determines the performance of these plans, life insurance on the lives of key managers can be important tool to provide funds for the search for replacements in event of death of these managers.

Executive Bonus Plan

A tax-deductible way to reward key executives. The plan can be offered to specific employees. The company gives the executive a bonus equal to the cost of the life insurance policy premium. The executive owns the policy and plays the premium. Cash values build on a tax-deferred basis and accumulated cash value is available for retirement. Any death benefit is income tax-free

Non-qualified Retirement Plans

A written contract between a corporate employer and an employee covering employment and compensation to be provided in the future. The funds, usually paid out as annuities or in lump sums, are taxed when withdrawn at retirement. Non-qualified plans do not meet the IRS guidelines with would allow them to receive favorable tax treatment.

Funding Requirements

Funds that are to be contributed to the retirement plan must legally be separated from other complain funds and accounts.

Individual Tax Shelter Pension/Retirement Plans-Qualified Plans

Insurance-related policies can be useful investment vehicles for retirement. Individual tax shelter pensions are plans that meet certain guidelines set by Congress and allow tax advantages, usually tax-deferred growth

Eligibility

Participation Retirement Age Vesting Provisions Contribution Limits Funding Requirements Fiduciary Responsibilities

Defined Contribution Plans

Provides an individual account for each participant. The employer contributes a certain amount to the plan but does not guarantee any certain payment at retirement. The retirement amount will be determined by the performance of the plan and the employee can often determine where funds will be invested within certain parameters. examples: 401(K), 403(B), employee stock ownership plans, and profit sharing plans.

Retirement Age Eligibility

There are normal and early retirement age considerations

403(B)

similar to a 401k, but only employees of certain nonprofit organizations can participate.

SIMPLE Plans

(Savings Incentive Match PLan for Employees) These plans target business with 100 or fewer employees. All employees with compensation of $5000 or more can participate Eligible employees must include those with one year of service and who are over 21 Employers using a SIMPLE plan may not also contribute to or accuse benefits from a qualified plan during the same year. Highly compensated employees that make more than $115000 are subject to limits. Employers must make a matching contribution up to 3% of the eligible employee's compensation, or a flat 2% of compensation on a non-participating basis.

Simplified Employee Pensions (SEPs)

SEPs are employer-sponsored IRAs that allow corporations to establish retirement plans for eligible employees set up until April 15th of the following year Any employees who have bee employed for three years or more of the past five years and who are age 21 or older must be included in the plan. The employer must invest the same percentage that he invests of his own income on his own behalf for each employee's income into a SEP on their behalf. Employer contributions into the employee's SEP are not included in the employee's gross income. Unlike Keogh plans, an employer is not required to make a set plan contribution each year, and may skip making contributions any given year or years.

A qualified retirement plan falls into one of three general categories:

1. Defined contributions plans 2. Defined benefit plans 3. Hybrid plans, which combine attributes of the first two categories

Tax-Qualified Plans

Meets IRS guidelines and that received favorable tax treatment such as deducting money from current income for income tax purposes.

Tax Advantages for Employers & Employees

Qualified plans allow the employer a tax deduction for the contributions it make to the plan in each year. For employees, income taxes on all contributions, interest, and earnings are deferred until withdrawal, usually at retirement.

Money Purchase Plans ((a.k.a. 401(a) investment plan))

Eligibility- These are defined contribution plans to which employer contributions are fixed. Pros and Cons- 1.Employer contributions are tax-deductible 2.Employer may exclude certain employees 3.Employer may establish a vesting schedule 4.Employer is required to fund annual contribution 5.Possible to grow larger account balances than under some other arrangements 6.Need to test that benefits to not discriminate in favorable of the highly compensated employees 7. Contributions and earnings are tax-deferred until withdrawn 8. Participant loans are usually permitted, but withdrawals are not permitted.

Keogh Plan

A tax-advantage personal retirement program that can be established by a self-employed individual, or by an individual working for an unincorporated business. An individual can contribute up to 25% of their income If employees have worked for 3 years or more, the self-employed individual must contribute the same percent of the employee's income to the Keogh as he or she did for their own plan. Plans must be in place before the end of the calendar year for which contributions are made. Once established, the employer is required to make annual contributions to the Keogh plan unless there is an exceptionally bad year, but contributions must be made on a regular basis. Employees are immediately vested in the plan. Employees maus begin withdrawing before age 70 1/2 MAIN BENEFIT: IF YOU MAKE 400,000 PLUS A YEAR, YOU CAN PUT MORE MONEY AWAY FOR RETIREMENT USING THIS PLAN

Fiduciary Responsibilities

Fiduciaries are the people who operate, take care of, and provide advice about the retirement plan. They have an obligation to act in the best interests of individuals affiliated with the retirement plan, and to manage the plan with the best intentions of maximizing returns, paying plan, expenses, and minimizing losses.

Profit-Sharing and 401 (K) plans

The plan allows a participant to elect to defer taxation on portions of current salaries or bonuses by placing the money in the plan. Interest on the money in the plan accumulates on a tax-deferred basis. Money put into the plan is 100% vested immediately. It cannot be forfeited due to employment termination or any other reason. Withdraw penalty is still in place

Vesting Provisions Eligibility

ERISA requires that pension plan sponsors must either: have 100% vesting of employer's contributions in defined contribution plans after a certain number of years or... vest incrementally by 20% annually after 2 years of service so that - there is 40% vested after three years the employee is 60% vested after four years there is 80% vested after five years full vesting occurs in the sixth year the vestment is applicable even if employees leave the company

Participation Eligibility

Are at or over 21 and have worked in the company for at least 1 year

Contribution Limits

Because of the tax ramifications of qualified plans, each has limits as to the amount allowed annual contributions.