A company can sponsor many types of retirement plans, including qualified and non-qualified plans. Nonqualified plans are taxed differently than qualified plans.
A qualified pension plan is one that satisfies certain provisions of the Internal Revenue Code, and in doing so, enjoys certain tax benefits. These benefits include deduction of contributions to the plan, exemption from tax for the investment earnings on plan investments and deferral of taxation to participating employees until benefits are distributed. There are two general types of qualified pension plans:
The two primary differences between defined benefit and defined contribution plans are:
- In a defined benefit plan, the employer bears the investment risk. This means that good investment returns lower the employer’s future costs and bad returns increase them. The employee’s benefit is not affected. In a defined contribution plan, employees bear the investment risk. Good returns increase their accounts and bad returns decrease them. The employer’s cost is not affected.
- The IRS applies limits to both types of plans. For a defined benefit plan, the limit applies to the benefit ultimately paid out. For a defined contribution plan, the limit applies to the contribution going in year-to-year.
You can also find information on other types of plans, including:
Below are some sample tools that clients can use to help them determine what type of qualified plan design meets their needs.
Contact us today if you’re interested in setting up a retirement plan for your business.
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