EMPLOYEE BENEFITS FAQs

What is a qualified retirement plan?
A qualified plan is a program maintained by an employer and/or employee organization to provide retirement income for employees. The term "qualified" means that the plan is afforded special tax treatment for meeting a number of requirements of the Internal Revenue Code.

What are some types of qualified retirement plans?
Qualified retirement plans fall into two major categories. They are defined benefit plans and defined contribution plans.

What is a defined benefit plan?
It is a retirement plan established and funded in such a way that it will provide income to a retiree that is based on income at the time of retirement.

What is a defined contribution plan?
It is a retirement plan established to provide a retirement benefit to an employee that is based on contributions the employer, and in some cases the employee, has made throughout the employee’s tenure. It is not designed to specifically replace income.

What are the basic tax advantages of a qualified plan?

• The sponsoring company is allowed an immediate tax deduction for the amount contributed to the plan for a particular year.

• Participants pay no current income tax on amounts contributed by the company on their behalf.

• Earnings on the plan are tax-exempt—permitting the tax-free accumulation of income and gains on investments.

• Income taxes on a partial or lump sum distribution may be deferred by rolling over the distribution to an individual retirement account (IRA) or to another qualified plan.

• Income taxes on a partial or lump-sum distribution to a deceased participant’s spouse may be deferred by rolling over the distribution to an IRA.

• Installment or annuity payments are taxed only when they are received.

Must a company be incorporated to have a qualified plan?
No. The benefits of a qualified plan are available in incorporated and unincorporated businesses alike. Sole proprietorships and partnerships can have comparable plans, as well.

What is the Employee Retirement Income Security Act?
The Employee Retirement Income Security Act of 1974 (ERISA) became law on September 2, 1974. ERISA completely overhauled the federal pension law to protect the interests of plan participants and their beneficiaries. ERISA established a new set of rules for participation in qualified retirement plans, added mandatory schedules for vesting of benefits, fixed minimum funding standards for some types of plans, set standards of conduct for administering the plan and handling plan assets, required disclosure of plan information, and enacted a system for insuring the payment of benefits.

What cost will the company incur in adopting a qualified plan?
Professional fees vary, depending on the type of plan adopted by the company. The following types of services are generally required:

• Legal services for drafting the plan and trust and for submitting those and other required documents to IRS to secure tax qualification;

• Accounting services;

• Actuarial services to provide cost and benefit computations if a defined benefit plan is adopted.

Must a qualified plan include all employees?
No. The Internal Revenue Code permits a company to exclude certain categories of employees from participation in its qualified plan, but only as noted in the plan document. These restrictions are usually related to minimum age and length of service requirements. They may also exclude union employees and nonresident aliens.

Can a company have more than one plan?
Yes. The Internal Revenue Code permits a company to maintain as many qualified plans as it chooses—provided all the plans meet the Code’s requirements, including limitations on benefits and contributions.

What is a 401(k) Plan?
A 401(k) Plan is a defined contribution plan that allows participants to defer a portion of their pay that would otherwise be payable in cash. It can be saved to the retirement plan on a federal tax deferred basis.

Are there special limitations that apply to these elective contributions?
Yes. Elective contributions must be 100 percent vested immediately and are subject to certain legal limitations.

What is the most an employee can contribute to a 401(k) plan?
In 2001 the maximum contribution allowed is $10,500. The maximum contribution will increase to $11,000 in 2002. Additional specific limitations may apply according to a particular plan and may also be effected by regulatory testing.

What is a matching contribution?
A matching contribution is an employer contribution to a plan that is allocated on the basis of the employee’s elective contribution. It may be either mandatory or discretionary.

What is an Individual Retirement Account (IRA)?
Historically, IRA has referred to an individual retirement arrangement establised and maintained by an individual for his or her own benefit. However, Congress has expanded the use of the term IRA to describe any type of individual savings plan receiving federal tax benefits.

What are the different types of IRA’s?
Traditional IRA—oldest type of IRA that may be either deductible or nondeductible, based on whether the individual is an active participant in a retirement plan and the individual’s adjusted gross income.

Roth IRA—a type of nondeductible IRA. The key distinguishing feature of a Roth IRA is that the earnings in the account are potentially tax free at the time of the distribution.

Education IRA—a type of plan that allows someone to made a contribution on behalf of a child in order to save for the child’s higher education.

SIMPLE IRA—a special type of IRA that can receive only employer contributions , including employee deferrals made pursuant to a savings incentive match plan for employees. Once the money has been contributed, then traditional IRA rules apply.