retirement plans
profit-sharing plans
Plans must provide participants with the formula the employer uses for contributions, the contributions may vary year to year, and contributions and interest are tax-deferred until withdrawal.
savings incentive match plan for employees (SIMPLE)
SIMPLE plans are available to small businesses (including tax exempt and government entities) that employ no more than 100 employees who received at least $5,000 in compensation from the employer during the previous year. An employer can choose to make nonelective contributions of 2% of compensation on behalf of each eligible employee. To establish a SIMPLE plan, the employer must not have a qualified plan in place.
defined benefit plans
pay a specified benefit amount upon the employee's retirement. When the term pension is used, it normally is referring to a defined benefit plan. The benefit is based on the employee's length of service and/or earnings. Defined benefit plans are mostly funded by individual and group deferred annuities
money purchase plans
Allow employers to contribute a fixed annual amount, apportioned to each participant, with benefits based on funds in the account upon retirement. Target benefit plans have a target benefit amount.
defined contribution plans
Defined contribution plans do not specify the exact benefit amount until distribution begins. Two main types of plans are profit-sharing and pension plans. The maximum contribution is the lesser of the employee's earnings or $49,000 per year.
the employee retirement income security act of 1974 (ERISA)
ERISA was enacted to provide minimum benefit standards for pension and employee benefits plans, including fiduciary responsibility, reporting and disclosure practices, and vesting rules. The overall purpose of ERISA is to protect the rights of workers covered under an employer sponsored plan.
roth IRAs
designed so that withdrawals are tax-free. Contributions to Roth IRAs are subject to the same limits as traditional IRAs, but are not tax-deductible. Interest on contributions is not taxable as long as the withdrawal is a qualified distribution. Qualified distributions must occur after five years in the event of death or disability of the individual, up to $10,000 for first-time homebuyers, or at the age of 59 ½.
tax benefits of qualified plans
Employer's contributions are tax-deductible and not treated as taxable income to the employee. Employee contributions are made with pre-tax dollars, and any interest earned on both employer and employee contributions are tax-deferred. Employees only pay taxes on amounts at the time of withdrawal.
pension plans
Employers contribute to a plan based on the employee's compensation and years of service, not company profitability or performance.
keogh plans
Keogh or HR-10 plans are for self-employed persons, such as doctors, farmers, lawyers, or other soleproprietors. Keoghs may be defined contribution or defined benefit plans. Defined contribution Keoghs have a maximum contribution of $49,000 per year, while defined benefit Keoghs have maximum benefits of $195,000 per year. Contributions are tax-deductible, and interest and dividends are tax-deferred.
qualified plans
Qualified plans are retirement plans that meet federal requirements and receive favorable tax treatment. Qualified plans provide tax benefits and must be approved by the IRS. The plans must be permanent, in writing, communicated to employees, defined contributions or benefits, and cannot favor highly paid employees, executives, or stockholders. The primary type of qualified plans includes defined benefit and defined contribution plans. To comply with ERISA minimum participation standards, qualified retirement plans must allow the enrollment of all employees over age 21 with one year experience. Qualified plans have the following features: • Employer's contributions are tax-deductible as a business expense. • Employee contributions are made with pretax dollars - contributions are not taxed until withdrawn. • Interest earned on contributions is tax-deferred until withdrawn upon retirement
rollovers
Rollovers are a transfer of funds from one IRA or qualified plan to another. Rollovers are taxable at 20%, unless the funds are deposited into a new IRA or qualified plan within 60 days of distribution.
simplified employee plans (SEPs)
SEP's are basically an arrangement where an employee (including a self-employed individual) establishes and maintains an IRA to which the employer contributes. Employer contributions are not included in the employee's gross income. A primary difference between a SEP and an IRA is the much larger amount that can be contributed to an employee's SEP plan is the lesser of 25% of the employee's annual compensation.
traditional IRAs
allow for an individual to contribute a limited amount of money per year, and the interest earned is tax-deferred until withdrawal. Contribution limits are indexed annually, currently at $5,000 per year, with $6,000 for individuals age 50 or older. Some individuals may deduct contributions from their taxes based on their adjusted gross income (AGI), but all withdrawals are taxable income. If an individual or spouse does not have an employer retirement plan, the entire contribution is tax-deductible, regardless of AGI. Withdrawals made prior to age 59 ½ are assessed an additional 10% penalty tax. To avoid penalties, traditional IRA owners must begin to receive payment from their accounts no later than April 1 in the year following the attainment of age 70 ½. Funds may be withdrawn prior to the employee reaching age 59 ½ without paying the 10% penalty tax (but the interest is still taxable) to the following: death, disability, first-time homebuyers up to $10,000, education (no dollar maximum), health insurance premiums if unemployed, qualified medical expenses.
individual retirement plans (IRAs)
established by an individual who has earned income to save for retirement
non-qualified plans
• Do not need to be approved by the IRS • Can discriminate in favor of certain employees • Contributions are not tax-deductible • Interest earned on contributions is tax-deferred until withdrawn upon retirement
stock bonus plans
These plans are similar to a profit-sharing plan, except that contributions by the employer do not depend on profits, and benefits are distributed in the form of company stock
federal pension act of 2006
This law sets forth standards for funding, participating, vesting, disclosure, and tax treatment of retirement plans. This Act improves the pension system and encourages employees to increase contributions to their employer-sponsored retirement plans. The provisions of the act have two main goals: addressing employers pension funds and assisting employees who are saving for retirement. It addresses employer responsibilities by requiring additional premiums for underfunded plans. It does this by requiring employers to obtain accurate assessments of the pension's financial obligations. It also closes loopholes by which underfunded plans skip payments and prevents employers with underfunded plans from promising extra benefits without first funding those benefits. It helps employees who save for retirement through qualified plans by: allowing employers to automatically enroll employees in defined compensation plans; provide more accurate information about accounts; increase access to professional advice about investments; allow for direct deposit of income tax refunds into IRA's; allow active military to make early penalty-free withdrawals; increase limits on contributions to all qualified plans; and provide for better portability for those plans.
cash or deferred arrangement (401k)
401(k) plans allow employers to make tax-deferred contributions to the participant, either by placing a cash bonus into the employee's account on a pre-tax basis or the individual taking a reduced salary with the reduction placed pre-tax in the account. The account's funds are taxable upon withdrawal.
withdrawals and taxation
Withdrawals by the employee are treated as taxable income. Withdrawals by the employee made prior to age 59 ½ are assessed an additional 10% penalty tax. Withdrawals are mandatory at age 70½, and failure to take the required withdrawal results in a 50% tax on those funds. Funds may be withdrawn prior to the employee reaching age 59 ½ without the 10% penalty tax: if the employee dies or becomes disabled; if a loan is taken on the plan's proceeds; if the withdrawal is the result of a divorce proceeding; if the withdrawal is made to a qualified rollover plan; or if the employee elects to receive annual level payments for the remainder of his life.
