Qualified Retirement Plans
Qualified retirement plans provide retirement benefits and meet stringent requirements under federal law. Some of these laws fall under the jurisdiction of the Treasury Department and the IRS; others fall under the Department of Labor. Qualified plans allow employees to defer reporting income from benefits until retirement while at the same time allowing employers to claim a current deduction for contributions to the plans.
Income earned by the plan is not currently taxed. Eventually it is taxed to employees when distributed to them as part of their benefits.
Types of Retirement Plans
There are 2 main categories of plans: defined benefit plans and defined contribution plans.
DEFINED BENEFIT PLANS
Defined benefit plans predict what an employee will receive in benefits upon retirement. This prediction is based on the employee’s compensation, age, and anticipated age of retirement. It is also based on an estimation of what the plan can earn over the years. Then an actuary determines the amount that an employer must contribute each year in order to be sure that funds will be there when the employee retires. The employer takes a deduction for the actuarially determined contribution.
There are, however, variations of defined benefit plans. For example, in a cash balance defined benefit plan, benefits payable upon retirement depend in part on plan performance.
DEFINED CONTRIBUTION PLANS
Defined contribution plans are more like savings accounts. The employer ...