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Understanding Employer-Sponsored Retirement Plans: Qualified and Non-Qualified, Thesis of Accounting

American InterContinental University (AIU)Accounting

An overview of retirement plans, focusing on employer-sponsored plans. It covers the differences between qualified and non-qualified plans, including defined benefit plans (pensions, annuities), defined contribution plans (profit sharing, money purchase, combination plans, thrift plans, esops, 401(k), 403(b), simple, sep, and target benefit plans), and non-qualified plans (457 plans). Qualified plans offer tax benefits, while non-qualified plans are more flexible but do not have the same tax advantages.

Typology: Thesis

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4 Types of Retirement Plans and Employer-Sponsored Plans
Among the different types of retirement plans, there are four main types: government-sponsored
plans, personal plans, annuities, and employer-sponsored plans.
•Government-sponsored Plans: The largest government-sponsored retirement plan is the
Social Security plan .
•Personal Plans: The most popular example is the Individual Retirement Agreement or
IRA, which can come in different types according to their tax treatment .
•Annuities: These are contracts established with an insurance company; there are fixed
and variable annuities .
•Employer-sponsored Plans: The two types of employer-sponsored retirement plans are
qualified and non-qualified retirement plans.
•Qualified retirement plans meet the Internal Revenue Code requirements and
the Employee Retirement Income Security Act of 1974 (ERISA) requirements.
These plans offer several tax benefits: they allow employers to deduct annual
allowable contributions for each participant; contributions and earnings on those
contributions are tax-deferred until withdrawn for each participant; and some of
the taxes can be deferred even further through a transfer into a different type of
IRA.
•Non-qualified retirement plans are those plans that either do not meet the IRS
Code requirements or the ERISA requirements.
Employer-Sponsored Plans
In the rest of this article, we will explore employer-sponsored plans in detail.
Qualified Plans
There are several types of qualified plans:
•Defined benefit plans are company retirement plans, such as pension plans, in which a
retired employee receives a specific amount based on salary history and years of service,
and in which the employer bears the investment risk. The employee, the employer, or
both may make contributions. The maximum amount a participant can contribute each
year is the smaller of $160,000 or the average compensations from the three highest
consecutive calendar years. These plans are better for people who have 20 years until
retirement or less, since the annual contributions can be larger.
•.0. Pensions are a type of retirement plan that guarantees a specific amount to be paid out to
the employee during retirement. The amount is calculated based on an employee’s salary, years
of service and a fixed percentage rate. The Pension Benefit Guarantee Corporation (PBGC), a
federal agency, covers employer-sponsored pension plans. The insurance covers a monthly
maximum amount of about $3,000 for a worker retiring at age 65. Eligibility depends on a
company’s policy; some companies require service for a certain period of time before an
employee can become eligible for a pension plan. If an employee leaves the job, the pension plan
stays with the previous employer.
•.1. Annuities are defined benefit plans that have fixed monthly payments at the age of
retirement. Note that annuities cannot be transferred into an IRA account, so the amount is taxed
as regular income the year it is received. There are different options for annuities:
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4 Types of Retirement Plans and Employer-Sponsored Plans

Among the different types of retirement plans, there are four main types: government-sponsored plans, personal plans, annuities, and employer-sponsored plans.

  • Government-sponsored Plans: The largest government-sponsored retirement plan is the Social Security plan.
  • Personal Plans: The most popular example is the Individual Retirement Agreement or IRA, which can come in different types according to their tax treatment.
  • Annuities: These are contracts established with an insurance company; there are fixed and variable annuities.
  • Employer-sponsored Plans: The two types of employer-sponsored retirement plans are qualified and non-qualified retirement plans. - Qualified retirement plans meet the Internal Revenue Code requirements and the Employee Retirement Income Security Act of 1974 (ERISA) requirements. These plans offer several tax benefits: they allow employers to deduct annual allowable contributions for each participant; contributions and earnings on those contributions are tax-deferred until withdrawn for each participant; and some of the taxes can be deferred even further through a transfer into a different type of IRA. - Non-qualified retirement plans are those plans that either do not meet the IRS Code requirements or the ERISA requirements.

Employer-Sponsored Plans

In the rest of this article, we will explore employer-sponsored plans in detail.

Qualified Plans

There are several types of qualified plans:

  • Defined benefit plans are company retirement plans, such as pension plans, in which a retired employee receives a specific amount based on salary history and years of service, and in which the employer bears the investment risk. The employee, the employer, or both may make contributions. The maximum amount a participant can contribute each year is the smaller of $160,000 or the average compensations from the three highest consecutive calendar years. These plans are better for people who have 20 years until retirement or less, since the annual contributions can be larger.

•.0. Pensions are a type of retirement plan that guarantees a specific amount to be paid out to the employee during retirement. The amount is calculated based on an employee’s salary, years of service and a fixed percentage rate. The Pension Benefit Guarantee Corporation (PBGC), a

federal agency, covers employer-sponsored pension plans. The insurance covers a monthly maximum amount of about $3,000 for a worker retiring at age 65. Eligibility depends on a company’s policy; some companies require service for a certain period of time before an employee can become eligible for a pension plan. If an employee leaves the job, the pension plan stays with the previous employer.

•.1. Annuities are defined benefit plans that have fixed monthly payments at the age of

retirement. Note that annuities cannot be transferred into an IRA account, so the amount is taxed as regular income the year it is received. There are different options for annuities:

■ Joint and 50%: The annuity is paid for life and after death, with the spouse receiving half of the amount for the rest of his or her life. ■ Joint and 66 2/3%: The annuity is paid for life and after death, with the spouse receiving two thirds of that amount for the rest of his or her life. ■ (^) Joint and 100%: The annuity is paid for life and after death, with the spouse receiving the full amount for the rest of his or her life. ■ 10-year certain & life: The annuity is paid for life; if the participant dies in the first 10 years of retirement, the beneficiary collects the same amount until reaching the 10th year of retirement at which point all payments stop. If the participant dies 10 years or more after retirement, the payments stop at the time of the death. ■ Life Only: The annuity is paid for life, and after death all payments stop. ■ Lump sum: The participant can take the total cash value of the retirement plan.

  • (^) Defined contribution plans allow the employer and/or employee to make contributions, so that the final benefits depend on how much was in the account and the rate earned by the account’s investments. An individual account must be set up for each participant in the plan. The federal government does not guarantee a participant’s benefits; instead, the plan is “participant-directed”, meaning that the employee makes the investment decisions based on the employer’s options. Contributions have a limit of roughly $50,000 or 25% of the participant’s total compensation. The different defined contribution plans are: •.2. Profit sharing: An employer alone makes contributions based on an employee’s current-year compensation. ■ Contributions: Employers can decide what amount and whether to contribute to the plan each year. The maximum that the employer can contribute is 15% whichever is less. In addition, contributions can only be made on the first $170,000. ■ Eligibility: Employees can be eligible to participate in the plan immediately or after one or two years of employment; the vesting schedule is up to six years. •.3. Stock bonus plan: A type of profit sharing plan, where contributions are made in the form of company stock. •.4. Money purchase pension plan: A retirement plan with fixed-percentage compensations by the employers. Unlike profit sharing plans, these contributions are mandatory every year, regardless of profits. ■ Contributions: The maximum that the employer can contribute is 25% of the participant’s compensation or $40,000, whichever is less. In addition, contributions can only be made on the first $200,000. Unless the plan is integrated with Social Security, all employees’ contribution must be the same percentage and must be made every year. ■ Eligibility: Employees can be eligible to participate in the plan immediately or after one or two years of employment; as with profit sharing plans, employees must be 100% vested in the plan.

earnings are tax-deferred until withdrawal. Distributions start at retirement age but participants

can also take distributions if they change jobs or if they have an emergency, including death. Participants can choose to take distributions as a lump sum, annual installments or as an annuity. Distributions are subject to ordinary income taxes and the amounts cannot be transferred into an IRA.