What Is a Qualified Retirement Plan?

By hrlineup | 02.01.2020

There are several ways individuals contribute to their retirement benefits. Some of these plans have an advantage when it comes to taxes. For such a program to enjoy any tax benefits, it has to conform to the standards set in the US tax code, section 401a.

Types of Qualified Retirement Plans

There are three classes of qualified retirement plans, namely:

1. Defined benefits plan

In a defined benefit plan, an employer pays a predetermined amount at either termination of employment or retirement. The employer breaks the sum into annual payments, which they deposit as savings to provide the benefits prescribed by the program’s terms.

2. Defined Contributions

An employer matches their employee’s deferred fraction of their compensation. The employer then accumulates the resulting total over a specified period as part of the employee’s retirement.

Under this plan, the amount is discretionary and so, you as the employer decides the amount to contribute to the program each year. However, the tax deduction is limited to a maximum of 25% of the total salary of the employees in this qualified employee benefit plan.

3. Hybrid plan

Also, an employer can use a combo-plan where they adopt both the traditional or cash balance and the profit-sharing systems to provide additional retirement benefits for a few employees. Even so, non-discrimination rules courting such as system are complex and requires the help of the Benefits Specialists to avoid any errors and enjoy maximum tax advantage of qualified retirement plans as a business while maximizing opportunities for your valuable employees.

Examples of qualified plans

The IRS, under tax code section 401a, guides what’s qualified to be a qualified plan. Nonetheless, some common examples include:

  • 401(k)
  • 403(b) plans
  • SOP – Employee stock ownership plans
  • Keogh (HR-10)
  • SEP – Simplified Employee Pension
  • SIMPLE – Savings Incentive Match Plan for Employees
  • Target benefit plans
  • Profit-sharing plans
  • Money purchase plans

Qualified Retirement Plan and Taxes

As an employer, your contributions towards a qualified plan are tax-deductible. Also, the assets in the plan grow tax-free.

If you are a small business owner and start a retirement plan for your employees, your business may receive tax credits of up $500 annually. These tax credits come in handy in administration, especially on educating them about the plan.

However, to qualify for such credits, your business must not have more than 100 employees who earned $5,000 gross pay the previous year. Your plan must also include at least one non-highly ranking employee.

There are significant benefits of retirement plans on employees as well. For starters, the IRS does not tax their investment in the program, at least not until they start redeeming the funds.

Since the contributions are payroll deductions, the employees can accumulate a substantial retirement income, which can significantly grow over the years under the protection of ERISA from creditors. What’s more, some 401(k) contributors may also be further eligible for tax credits.

In, all in all, there could be no better, simpler, and convenient way to retain your valuable employees than offering them a retirement dream of their lives. Qualified retirement plans offer you a golden opportunity to actualize your employees’ dream retirement and further offer you significant tax breaks that can help you boost your business.

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