Qualified Retirement Plans
A qualified plan must meet a certain set of requirements in the Internal Revenue Code such as minimum participation, vesting and funding requirements. In return, the IRS provides tax advantages to encourage businesses to establish retirement plans including:
- Employer contributions to the plan are tax deductible.
- Earnings on investments accumulate tax-deferred which may allow contributions and earnings to compound at a faster rate.
- Employees may make pre-tax or after-tax Roth contributions and any earnings are tax deferred.
- Ongoing plan expenses are tax deductible.
In addition, sponsoring a qualified retirement plan has the following advantages:
- Attract experienced employees in a very competitive job market: Retirement plans are fast becoming a key part of the total compensation package.
- Retain and motivate good employees: A retirement plan can help you keep employees from moving over to your competitors.
- Help employees save for their future since Social Security retirement benefits alone will be an inadequate source to support a reasonable lifestyle for most retirees.
- Plan assets are protected from creditors.
Employers can choose between two basic types of retirement plans: defined contribution and defined benefit. Both a defined benefit and defined contribution plan may be sponsored to maximize benefits. Our consultants can help you choose the right plan for your company. Listed below is a description of the types of plans that are available. 403(b) Plans A 403(b) plan, sometimes referred to as a Tax Deferred Annuity, is a deferred compensation plan, similar to a 401(k) plan, that is available to employees of tax exempt organizations under Section 501(c)(3) of the Internal Revenue Code such as public schools, colleges, hospitals, churches, charitable foundations, etc. Like 401(k) plans, employees contribute to the plan via payroll deduction on a pre-tax basis and the earnings accumulate tax-deferred until withdrawn. The pre-tax deferral and catch-up limits are the same as a 401(k) plan. Employer contributions in the form of matching and discretionary contributions are also permitted. 403(b) plans may or may not be subject to the provisions of ERISA depending on their design and operation. 457 Plans A 457 plan is a deferred compensation plan available to certain state and local governments, and non-governmental entities that are tax exempt under Internal Revenue Code 501. These plans are similar to 401(k) and 403(b) plans in that employees contribute to the plan via payroll deduction on a pre-tax basis and earnings accumulate tax-deferred until withdrawn. The pre-tax deferral and catch-up limits are the same as the limits for 401(k) and 403(b) plans. Different rules apply depending upon whether the employer is a governmental entity or a tax-exempt entity.
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