Qualified retirement plans are set up by employers to provide employees with opportunities to save for retirement. A self-employed person or small business owner can also set up some of these plans, even if there are no employees in the business.
Qualified Retirement Plans meets the requirements of Internal Revenue Code Section 401(a) and the Employee Retirement Income Security Act of 1974 (ERISA) and is thus eligible for favorable tax treatment. These plans offer tax benefits to both employer and employees: 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allowable contributions for each participant; contributions and earnings on those contributions are tax-deferred until withdrawn for each participant.
A plan set up by small to medium business employers will fall into one of the following categories:
A. Defined contribution plans. This type of plan does not guarantee an employee a fixed level of benefits upon retirement. Instead, the employer contributes a fixed amount to an account set up for the employee. Under such plans, employees may receive even less than total contributed, if plans sustains fall of investments.
B. Defined benefit plans. The tax code defines this type of plan as any plan that is not a defined contribution plan. More specifically, these pension and annuity plans promise the employee a fixed or determinable monthly payment upon retirement.
More Details on Each Plan
Contributions must be recurring and substantial. Do not have to be made every year. Do not have to be based on profits. Are allocated the participants accounts based on plan formula. Deduction is limited to 25% of compensation of all employees’ covered under the plan.
Stock Bonus Plan
It is a Profit-Sharing Plan funded with employer stock.
Money Purchase Plan
Contribution is defined by formula, which must be made every year.
IRC 401(K) Plans
- Contribution: Employer => non-elective contribution.
Employee => elective deferral-pre tax subject to FICA & FUTA
- Elective Deferral: Limit in 2007: $15,500 + $5,000(catch up).
- Catch up: age 50 by year end.
Self-employed individuals (Sole proprietors and Partners) and their employees 25% of (earned income – ½ of SE tax – Keogh)
SEPS (Simplified Employee Pension Plans)
- Set up and contribution must be completed by due date of income tax return not including extension.
- Eligible employees: age 21, 3 out of 5year service requirement compensation of $500 or more.
- Contribution: 25% of compensation or $45,000.
- Deduction: Limited to 25% to total compensation paid to all eligible employees.
- Eligible employer: no more than 100 employees making $5,000 or more. Must be established by October 1 of year (no later than end of year if company starts up after October 1).
- Contribution: employer – matching 3% of compensation limited by employee contribution. Non matching 2% of compensation (compensation limit $225,000).
- Employee – $10,500(2007) catch up $2,500.
- Due date- due date of income tax return not including extension.