Definition
A Qualified Plan or Qualified Trust refers to an employer-established pension or profit-sharing plan designed for the benefit of employees. These plans comply with the requirements set forth by the Internal Revenue Service (IRS) under the Employee Retirement Income Security Act of 1974 (ERISA) and subsequent amendments, including significant updates in 1986. The primary features of qualified plans include:
- Employer Deductions: Employers can deduct contributions to the plan immediately.
- Tax-Deferred Growth: The income generated within the trust is not subject to taxes until distributed.
- Employee Taxation: Employees are taxed on the income only when they receive distributions from the plan.
Examples
- 401(k) Plans: A well-known example where employees contribute a portion of their pre-tax salary, often with matching contributions from the employer.
- Defined Benefit Plans: These promise a specific monthly benefit at retirement, which may be determined through a formula considering salary and years of service.
- Profit-Sharing Plans: Employers contribute a portion of their profits to employee accounts, with contributions being discretionary.
Frequently Asked Questions
What are the main types of qualified plans?
The main types are defined benefit plans, defined contribution plans (such as 401(k) plans), and profit-sharing plans.
What are the tax benefits of a qualified plan?
Employers benefit from immediate tax deductions on contributions, and employees enjoy tax-deferred growth on their retirement savings, only paying taxes upon distribution.
Can employees contribute to a qualified plan?
Yes, employees can contribute to certain types of qualified plans, like 401(k) plans, often through payroll deductions.
What requirements must a qualified plan meet?
Qualified plans must adhere to IRS requirements, such as nondiscrimination rules, contribution limits, and vesting schedules, to ensure they do not disproportionately benefit highly compensated employees.
When can employees start withdrawing from a qualified plan without penalties?
Employees can generally begin taking distributions without penalties at age 59½, though the required minimum distributions must start at age 72.
Related Terms
- 401(k) Plan: A defined contribution plan where employees can make pre-tax contributions from their salary.
- Defined Benefit Plan: A pension plan that provides a specific benefit at retirement, calculated based on factors such as salary and years of service.
- Employee Retirement Income Security Act of 1974 (ERISA): Federal law that sets standards for most voluntarily established pensions and health plans to ensure that plan funds are protected.
- Vesting: The process by which employees earn the right to the employer-contributed portion of their retirement benefits over time.
Online References
- IRS Retirement Plans: Provides comprehensive guidelines and updates on qualified plans.
- Employee Benefits Security Administration (EBSA): Offers regulatory oversight and resources related to ERISA.
Suggested Books for Further Studies
- “Retirement Plans: 401(k)s, IRAs, and Other Deferred Compensation Approaches” by Alan S. Gutterman
- “ERISA: Principles of Employee Benefit Law” by Peter J. Wiedenbeck
- “Qualified Retirement Plans” by Steven J. Franzin
- “Pension and Profit Sharing Plans” by Allen E. Rosica
Fundamentals of Qualified Plans: Finance Basics Quiz
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