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Types of Qualified Retirement Plans
What Is a Qualified Retirement Plan?
It is a Retirement Plan maintained by an Employer that ....provides retirement
income to employees ...and/or results in the deferral of income by employees for periods
extending generally to the end of employment.
The employer is afforded favorable tax treatment (i.e.: a deduction) for contributions
made to the Plan assuming they fall within prescribed IRS limits and the Plan meets all of
the "qualification requirements" under the Internal Revenue Code
Why Should a Company Adopt a Qualified Retirement
Plan?
A Qualified Retirement Plan is one of the best tax shelters
available. The Company is allowed current tax deductions for it's contributions to
the plan and the Employee pays no tax on monies contributed to the Plan until a
distribution is made. Also, earnings from investments made with the Plan funds
accumulate tax free. Thus, long term employees (i.e.: usually key employees) can
accumulate large sums of money through the tax free build up of capital
There are also non tax reasons for adopting qualified Plan. They; attract good employees; reduce employee turnover; increase employee incentive; and, accumulate funds for retirement.
What Are The Basic Types of Qualified Retirement
Plans?
Qualified Retirement Plan Fall Into Two Categories: Defined
Contribution Plans and Defined Benefit Plans
Defined Contribution Plans (DC Plans): DC Plans are retirement Plans that provide for an "individual account" for each participant. The ultimate retirement benefit that each participant receives is dependent largely on two variables; the amount of employer contributions or forfeitures allocated to the account... and ...the investment experience of the fund (earnings, gains/losses, expenses, etc..) There is no guaranteed retirement benefit (i.e.: no "Defined Benefit"). DC Plans include the following:
Defined Benefit Plans (DB Plans): DB Plans are retirement Plans other than "individual account Plans" . In other words......any Plan that is not a Defined Contribution Plan usually is a Defined Benefit Plan. In a Defined Benefit Plan the ultimate retirement benefit is stated (i.e.: "definitely determinable".). The benefit is based on the Plan formula, your salary, and , in most cases, the number of years of service you work for your the employer. The ultimate benefit is called the "retirement benefit" and the amount/portion of that benefit that you have earned at any point in time is called your "accrued benefit". In most cases...you will only earn your full retirement benefit (i.e: "fully accrue your benefit) if you continue your employment until the "normal retirement age" stated in Plan document.
If a Plan is classified as a Defined Benefit Plan the following is true.....retirement benefits are geared to the Plan Formulas not to contributions.......it is not an individual account plan........the annual employer contribution is actuarially determined......some benefits may be insured by the PBGC.