I understand that you are considering adopting a qualified retirement plan for your employees. Below is some introductory information on qualified retirement plans in general.
Qualified plans are retirement plans that meet the qualification requirements set out in the Internal Revenue Code. These qualifications requirements are generally intended to protect participants’ rights and benefits under the plan and to ensure that highly compensated employees do not benefit disproportionately under the plan. Qualification provides three main tax benefits:
(1) the qualified plan trust is exempt from tax;
(2) the plan participants generally are not taxed on the contributions made to the plan on their behalf until those amounts are distributed; and
(3) the employer is entitled to a current deduction for the contributions it makes to the plan.
There are two basic types of qualified plans:
- defined contribution plans, and
- defined benefit plans.
A defined contribution plan provides an individual account for each plan participant. A participant’s benefits are based on the amount contributed to the participant’s account and any income, expenses, gains, losses, and forfeitures of other accounts that may be allocated to that account. Profit-sharing plans (including a 401(k) plan), a stock bonus plans, money purchase pension plans, target benefit plans, and employee stock ownership plans (ESOPs) are all types of defined contribution plans.
A defined benefit plan is any plan that is not a defined contribution plan. The plan must provide for a “definitely determinable benefit” over a period of years, usually for life, at retirement, based on a formula that takes into account such factors as years of service and compensation. Contributions to a defined benefit plan are based on the amount needed to provide the benefits promised to plan participants. The required contributions are determined by an actuary, based on actuarial assumptions regarding the number of years to retirement, the benefit amount, the assumed interest rate, and life expectancy after retirement. A defined benefit plan is not treated as providing definitely determinable benefits unless, whenever the amount of any benefit is to be determined on the basis of actuarial assumptions, those assumptions are specified in the plan in a way that precludes employer discretion. The cost of maintaining a defined benefit plan is generally significantly higher than the cost of maintaining a defined contribution plan, due in part to annual actuarial fees.
Please call me at your convenience if I can assist you with more than this basic information on qualified plans.
Please contact the office of Don Fitch Accountancy at (760)567-3110 or Email Don.Fitch@CPA.com if you have any questions or would like additional information.
DON FITCH, CPA
74478 Highway 111 #3
Palm Desert, CA 92260
Toll Free: (877)CPA-Help or (877)272-4357
P.S. My firm is based upon referrals. Please feel free to refer my firm to anyone you know that is looking for a new CPA and/or tax preparer. Thank you in advance.
(Updated 04112021 320-309)