Lecture 20 Introduction to Qualified Retirement Plans

1
Lecture 20Introduction to Qualified Retirement
Plans

• What does it mean to be qualified?
• Taxation
• Management objectives in pension plan design
• Governments role
• Qualified plan characteristics
• Classification of qualified plans

2
What Does It Mean To Be Qualified?

• Meets the applicable government regulations
• Receives favorable tax treatment

3
Taxation

• Under a qualified plan, the employer gets a tax
  deduction when the contributions are made to the
  plan
• The employee is not taxed on the contributions
• The investment income on the assets in the plan
  is not taxed
• The employee is taxed on benefits when they are
  received
• The tax break is the lag between the deduction
  for the employer and the taxation for the
  employee several (or many) years later

4
Management Objectives in Pension Plan Design

• Help employees with retirement saving
• Tax deferral for owners and highly compensated
  employees
• Help recruit, retain and retire employees
• Encourage productivity directly
• Discourage collective bargaining

5
Governments Role

• Set rules for favorable tax treatment
• Tax revenue loss issue
• Discrimination in favor of HCEs
• Encouraging private saving

6
Qualified Plan Characteristics

• Eligibility (Chapter 19)
• Minimum age cannot be over 21
• Service requirement cannot be more than 1
• Must cover at least 70 of non-HCEs
• Nondiscrimination in benefits and contributions
  (Chapter 20)
• Funding requirements
• Vesting requirements (Chapter 21)

7
Qualified Plan Characteristics - (cont.)

• Limitations on benefits and contributions
  (Chapter 25)
• Pension limited to 90,000 (indexed)
• Contributions limited to 30,000
• Benefits limited to first 150,000 (indexed) of
  compensation
• Payout restrictions
• Tax penalty (10) for withdrawal of funds before
  age 59 1/2 , unless for death or disability
• Top-heavy rules

8
Classification of Qualified Plans

• Pension or profit-sharing plans
• Defined benefit or defined contribution plans
• Types of plans
• Defined benefit pension plan
• Cash-balance pension plan
• Target-benefit pension plan
• Money-purchase pension plan
• Profit-sharing plan
• Section 401(k) plan
• Stock bonus plan
• Employee Stock Ownership Plan (ESOP)