Why should a company adopt a Qualified Retirement Plan?
•The company is allowed a current deduction for its contributions to the plan.
•The employee pays no tax on money contributed for the employee’s benefit until a distribution is made.
•Earnings from investments made with funds in the plan accumulate tax-free.
•Distributions from the plan may be afforded favorable tax treatment.
•The employees who participate in the plan have the opportunity to move to a lower tax bracket, depending on the contributions made.
•Increasing employee incentive
•Accumulating funds for retirement
•Reducing employee turnover
•Attracting employees
What is a Retirement Plan?
•A retirement plan means any plan or program maintained by an employer or an employee organization (or both) that:
1.Provides retirement income to employees or,
2.Results in a deferral of income by employees for periods extending generally to the end of employment or beyond, regardless of how plan contributions or benefits are calculated or how benefits are distributed.
•A retirement plan is deemed “Qualified” when it meets the conditions set forth by the Internal Revenue Service.
•A Qualified Retirement Plan (QRP) is afforded special tax treatment for satisfying a host of requirements of the Internal Revenue Code.
•A QRP has the advantage of legal shelter; the assets inside a QRP cannot be claimed by creditors (see O.J. Simpson’s case).
•Defined Contribution Plans
–Provides benefits based on the amount contributed to an employee’s individual account
•Defined Benefit Plans
–Provides a definitely determinable annual benefit
–The benefits are determined on the basis of a formula contained in the plan
•Profit Sharing Plan
•Money Purchase Pension Plan
•Target Benefit Pension Plan
•401(k) Plan
•Plan contributions are determined by formula and not by actuarial requirements (except for Target Benefit Pension Plans).
•Plan earnings and losses are allocated to each participant’s account and do not affect the company’s retirement plan costs.
•Plan benefits are not insured by the Pension Benefit Guaranty Corporation (PBGC).
•Plan formulas are geared to retirement benefits and not to contributions.
•The annual contribution is usually actuarially determined.
•Certain benefits may be insured by PBGC.
•Early termination of the plan is subject to special rules.
•Forfeitures reduce the company’s cost of providing retirement benefits.
•A 401(k) Plan is a profit sharing plan that offers participants an election to receive company contributions in cash or to have these amounts contributed to the plan.
•A participant in a 401(k) Plan does not have to include in income any company contributions to the plan merely because an election could have been made to receive cash instead.
•A common form of 401(k) Plan is arranged in the form of a salary reduction agreement, with employer matching.