Qualified Retirement Plan
Candlefocus EditorQualified retirement plans can be either defined-benefit or defined-contribution plans. Defined-benefit plans (DB plans) guarantee a specific accrued paycheck from the employer at the time of retirement. These plans favor those with longer-term job tenure and are thus typically used in larger companies. By contrast, defined-contribution plans provide the balance of the participants’ account value to employees at the time of retirement. These plans tend to be more common among smaller employers. Employer contributions are based on a percentage of the employee’s income up to a maximum limit determined by the plan. Contributions are either fixed or discretionary, depending on the plan.
Notably, qualified retirement plans allow employers and employees to take advantage of certain tax benefits. Employees can take a tax deduction on their contributions to qualified retirement plans, while their employers can often get tax credits or deductions on contributions to their employees’ accounts. Furthermore, investment gains earned within the plan are generally taxable only when they’re withdrawn.
Common qualified retirement plans include traditional pensions, 401(k) plans and profit-sharing plans. Traditional pensions (also known as “traditional defined benefit plans”) are the most common type of qualified plan. They provide employees with a fixed sum of money or a percentage of their salary upon retirement, based on a formula outlined in the plan document.
401(k) plans are the most popular type of qualified retirement plan today. These plans are designed to allow employees to contribute a portion of their salary on a tax-deferred basis. Employers may also contribute to their employees’ 401(k) accounts each year, and in some cases, may match employee salary deferrals up to a set amount.
Profit-sharing plans are another popular qualified retirement plan option. They allow employers to allocate a portion of the organization’s profits or profits from a specific company division to employees’ retirement accounts on either a discretionary or mandatory basis. Employers may also give vested benefits, allowing the employee to take advantage of the company’s investment gains or losses.
Qualified retirement plans are a great way for employers to provide financial security to their employees and gain tax incentives for doing so. In addition to providing tax breaks for employers and employees, qualified retirement plans allow employers to offer meaningful retirement benefits on par with those offered by larger organizations. With a qualified retirement plan, employees can save for retirement financially and securely, while employers are able to provide their employees with the financial security they need.