Qualified Plans

Qualified Plan Types, Characteristics and Purchasers.

1) Simplified Employee Pensions (SEPs):It's a Qualified Plan, and must follow ERISA. It's an Employer-sponsored IRAs. Corporations can use this Plan to establish employer-funded pension plan for eligible employees. IRAs may not be funded by life insurance products, with the exception of annuities. Under SEP, an employer can contribute specific amounts directly into IRA accounts of eligible employees. Employer contributions are tax deductible, to the extent that the contribution does not exceed the maximum allowed. The entire distribution is taxable as ordinary income to the employee upon retirement, since contributions are made with before-tax dollars. 2) Self-employed Plans (HR-10 or Keogh Plans): Type of Retirement Plan also know as HR-10 Plan. This plan is mainly provided to self-employed or partners, and their employees, who want to make a retirement plan that will provide tax deferral and a reduced tax liability. Corporate officers, Shareholders/Employees, and Limited Partners are NOT eligible. Like an IRA, contributions to a Keogh Plan is tax deductible. Keogh Plans may be funded by Life Insurance. They have the same early withdrawal penalties as any other Qualified Plans. 3) Profit Sharing and (401(k) Plans): 401(k) Plan allows employees to voluntarily reduce their income by deferring those amounts into a Qualified Retirement Plan. Contributions made by employees are tax deductible, and their retirement account will grow tax deferred until distribution upon retirement. Employers will match the contributions made by employees. Early withdrawal penalty applies here as well, as it is typical for all Qualified Plans. In a Profit Sharing plan, Employer contribution may be made only when company profit is made. Usually the contribution will be a specified share of company profit(such as 20%) up to maximum percentage of an employee's salary (such as 5%) 4) SIMPLE (Savings Incentive Match Plan for Employees) Plan: A Simplified Retirement Plan for small employers (With less than 100 employees) who can't find any other retirement plan to offer to employees. This can be structured as IRA or 401(k) Plan, and allows for elective contributions by the employer. Plans must meet Vesting and Participation requirements by ERISA, but are generally not subject to the nondiscrimination rules applicable to other qualified plans. Employee Contributions must be through a qualified salary deduction plan, according to a set percentage of compensation. Employer Contributions may either be dollar-for-dollar matching contribution or non-elective contribution for each eligible employee. All Contributions in SIMPLE Plan must be vested IMMEDIATELY to the employee. SIMPLE Plan also has the typical 10% early withdrawal penalty, but if early distribution made within the first 2 years is subject to a high 25% early distribution penalty. This is to encourage employees to utilize this plan as a retirement plan, rather than an investment. 5) 403 (b) Tax Sheltered Annuities (TSAs): Contributions are made with before tax dollars, as are all Qualified Plans. Voluntary before-tax dollars are contributed by reducing income by ways of salary reduction and contributing that amount into a TSA account on a tax deferred basis. Those Eligible for TSAs include: -Public school teachers, -School superintendents -College professors -Employees of religious-affiliated hospitals and charities. 10% Early withdrawal penalty also applies here.

Federal Tax Considerations of a Qualified Plan

1) Advantages: Qualified Plans have advantages for both employers and employees. For employer, the amount employers contribute to a Qualified Plan for their employee is Tax Deductible as business expense in the year paid in. For the employee, the contributions paid in by employer is tax deferred and the employee won't be taxed on the employer contribution and accrued interest until they are withdrawn. 2) Rollovers: Taxes may be deferred even further if withdrawals are "rolled over" to another Qualified Plan, for example an IRA. Rollovers are permitted once a year, but there is no limit to how much you can Roll Over. Rollovers may be subject to withholding tax, unless the rollover is a "trustee to trustee rollover". 3) Withdrawals: Since contributions are made with before-tax dollars, the entire withdrawal is taxed as ordinary income. If early withdrawal is made then 10% penalty is levied on the entire amount of the withdrawal. 4) Transfers: Transfers of qualified retirement funds may be either "direct" or "plan-to-plan". In a Direct Transfer, the participant may transfer all or portion of their retirement funds from one investment provide to another investment provider within their qualified plan, but both investment providers must be part of the same employer's plan. In a Plan-to-Plan Transfer, it allows the participant to transfer funds from one employer's plan to another employer's plan as long as it is the same type of qualified retirement plan. Such as when participant changes job and uses Plan-to-Plan Transfer to transfer the retirement funds from Employer A's Plan to Employer B's Plan. 5) Contributions: Contributions are made with before-tax dollars, so upon withdrawal 100% will be taxable as ordinary income. But as mentioned before, contributions made by employer is tax deductible. 6) Taxation of Distributions: Contributions to a Qualified Plan is Tax Deferred to the employee. When the fund is withdrawn, 100% is usually taxable as ordinary income since contributions are made with before-tax dollars. Withdrawals before age 59 1/2 is subject to 10% early withdrawal penalty. In most cases, minimum distributions must be taken out by April 1st of the year after the year in which they turned age 70 1/2. So in a Qualified Plan, you shouldn't withdraw funds before age 59 1/2, but should withdraw funds before passing the age of 70 1/2.

General Requirements of a Qualified Plans

Qualified Plan basically means that it is contributed with Before-tax dollars, and it is an Employer Sponsored Retirement Plan. In order for a Plan to be considered Qualified, it must meet the following ERISA(Employee Retirement Income Security Act) criteria: 1) Vesting: Vesting means ownership. All Qualified Plans must establish a vesting schedule, meaning contributions made by the employer to the employee's plan must gradually belong to the employee no later than end of the sixth year, sometimes three years. Contributions made by an Employee to a Qualified Plan must vest immediately. 2)Eligibility: If a Qualified Plan is offered by an employer, then all full time employees(working 1,000hours/year or more) who have worked for at least 1 year and are age 21 or more, must be covered. 3)Non-Discrimination: All workers must be treated alike. So employers must contribute the same percentage for both higher paid workers AND lower paid workers. Contributions made by employer to a qualified plan is tax deductible. There is Early withdrawal penalty of 10%