Qualified Plans

Question 1

Terms

Answer 1

Earned income - salary, wages, or commissions; but not income from investments, unemployment benefits, and similar
Gross income - a person’s income before taxes or other deductions
Nonprofit organization - an organization that uses its surplus to fulfill its purpose instead of distributing the surplus to its owners or members
Pretax contribution - contribution made before federal and/or state taxes are deducted from earnings
Rollover - withdrawal of the money from one qualified plan and placing it into another plan
Vesting - the right of a participant in a retirement plan to retain part or all of the benefits

Question 2

General Requirements

Answer 2

General Requirements
An employer sponsored qualified retirement plan is approved by the IRS, which then gives both the employer and employee benefits
such as deductible contributions and tax-deferred growth.
Qualified plans have the following characteristics:
• Designed for the exclusive benefit of the employees and their beneficiaries;
• Are formally written and communicated to the employees;
• Use a benefit or contribution formula that does not discriminate in favor of the prohibited group - officers, stockholders, or
highly said employees;
• Are not geared exclusively to the prohibited group;
• Are permanent;
• Are approved by the IRS; and
• Have a vesting requirement.
Know This! Qualified plans have tax advantages.
In contrast, nonqualified plans are not subject to the requirements regarding participation, discrimination, and vesting as qualified
plans. Nonqualified plans require no government approval and are used as a means for an employer to discriminate in favor of a
valuable employee with regard to employee benefits. Nonqualified plans accept after-tax contributions.

Question 3

Plan Types, Characteristics and Purchasers

Answer 3

Plan Types, Characteristics and Purchasers
1. Individual Qualified Plans - IRA and Roth IRA
The 2 most common qualified individual retirement plans are Traditional IRAs and Roth IRAs. Anybody with earned income can
contribute to either plan.
2019 removed the prior age limit for all contributions starting in tax year 2020. Plan participants are allowed to contribute up to a
specified dollar limit each year, or 100% of their salary if less than the maximum allowable amount. Individuals who are age 50 or older
are entitled to make additional catch-up contributions. A married couple could contribute a specified amount that is double the
individual amount, even if only one person had earned income. Each spouse is required to maintain a separate account not exceeding
the individual limit.
In traditional IRAs, the owner may withdraw the funds at any time. However, withdrawals prior to age 59 ½ are considered early
withdrawals and are subject to a 10% additional tax. Starting at age 59 ½, the owner may withdraw assets without having to pay the
10% additional tax. However, the owner must start receiving distributions from the IRA at the age of 72 (the SECURE Act of 2019
raised the required minimum distribution age from 70 ½ to 72). Starting at age 72, the owner must receive at least a minimum annu
amount knownac the reguredminmumdictribution/RMD.

known as the required minimum distribution (RMD).
The Roth IRA is a form of an individual retirement account funded with after-tax contributions. An individual can contribute 100% of
earned income up to an IRS-specified maximum, as with traditional IRAs (the dollar amounts change every year). Roth IRA
contributions can continue regardless of the account owner’s age, and in contrast with a traditional IRA, distributions do not have to
begin at age 72 (previously 70½). Roth IRAs grow tax free as long as the account is open for at least 5 years.

Question 4

Self Emploved Plans (HR-10 or Keogh Plans)

Answer 4

Self Emploved Plans (HR-10 or Keogh Plans)
HR-10 or Keogh plans make it possible for self-employed persons to be covered under an IRS qualified retirement plan. These plans
allow the self-employed individuals to fund their retirement programs with pre-tax dollars as if under a corporate retirement or
pension plan. To be covered under a Keogh retirement plan, the person must be self-employed or a partner working part time or full
time who owns at least 10% of the business.
Contribution limits are the lesser of an established dollar limit or 100% of their total earned income. The contribution is tax deductible,
and it accumulates tax deferred until withdrawal.
Upon a participant’s death, payouts can be available immediately. If a participant becomes disabled, he or she may collect benefits
immediately or the funds can be left to accumulate. When a participant enters retirement, distribution of funds must occur no earlier
than age 59½ and no later than age 72. If withdrawn before 59½, there is a 10% penalty. At any time payments may be discontinued
with no penalty, and funds can be left to accumulate.
Under eligibility requirements, any individual who is at least 21 years of age, has worked for a self-employed person for one year or
more, and worked at least 1,000 hours per year (full time) must be included in the Keogh Plan. The employer must contribute the
same percentage of funds into the employee’s retirement account as he/she contributes into his/her own account.

Question 5

3. Simplified Employee Pensions (SEPs)

Answer 5

3. Simplified Employee Pensions (SEPs)
   A Simplified Employee Pension (SEP) is a type of qualified plan suited for the small employer or for the self-employed. In a SEP, an
   employee establishes and maintains an individual retirement account to which the employer contributes. Emplover contributions are
   not included in the employee’s gross income. The primary difference between a SEP and an IRA is the much larger amount that can
   be contributed each year to a SEP (an IRS established annual dollar limit or 25% of the employee’s compensation, whichever is less).

Question 6

4. SIMPLE Plans

Answer 6

4. SIMPLE Plans
   A SIMPLE (Savings Incentive Match Plan for Employees) plan is available to small businesses that employ no more than 100
   employees who receive at least $5,000 in compensation from the employer during the previous year. To establish a SIMPLE plan, the
   employer must not have a qualified plan already in place. Employees who elect to participate may defer up to a specified amount each
   year, and the employer then makes a matching contribution, dollar for dollar, up to an amount equal to 3% of the employee’s annual
   compensation. Taxation is deferred on both contributions and earnings until funds are withdrawn.

Question 7

5. Profit Sharing and 401(k) Plans

Answer 7

5. Profit Sharing and 401(k) Plans
   Profit-sharing plans are qualified plans where a portion of the company’s profit is contributed to the plan and shared with employees.
   If the plan does not provide a definite formula for figuring the profits to be shared, employer contributions must be systematic and
   substantial.
   A 401(k) qualified retirement plan allows employees to take a reduction in their current salaries by deferring amounts into a
   retirement plan. The company can also match the employee’s contribution, whether it is dollar for dollar or on a percentage basis.
   Under a 401(k) plan, participants may choose to do one of the following:
   • Receive taxable cash compensation; or
   • Have the money contributed into the 401(k), in cash or deferred arrangement plans (CODA).
   Contributions into the plan are excluded from the individual employee’s gross income up to a specified dollar amount. The ceiling
   amount is adjusted annually for inflation. The plan allows participants age 50 or over to make additional catch-up contributions (up to
   a limit) at the end of the calendar year.
   A 401(k) plan may be arranged as:
6. Pure salary reduction plan;
7. Bonus plan; or
8. Thrift plan.
   Under the bonus or thrift plan, the employer will contribute certain amount or percentage for each dollar contributed by the
   employee; however, employee contributions are not always required.
   Plans permit early withdrawal for specified hardship reasons such as death or disability. Loans are also permitted in certain instances
   up to 50% of the participant’s vested accrued benefit or the annual IRS-established dollar amount.

Question 8

6.403(b) Tax Sheltered Annuities (TSAs)

Answer 8

403(b) plan or a tax-sheltered annuity (TSA) is a qualified plan available to employees of certain nonprofit organizations under
Section 501(c)(3) of the Internal Revenue Code, and to employees of public school systems.
Contributions can be made by the employer or by the employee through salary reduction and are excluded from the employee’s
current income. As with any other qualified plan, 403(b) limits employee contributions to a maximum amount that changes annually,
adjusted for inflation. The same catch-up provisions also apply.
Know This! 403(b) plans are for nonprofits and public-school systems.

Question 9

Corporate Pension Plans

Answer 9

Corporate Pension Plans
Corporate pension plans can be divided into two categories:
1. Defined benefit plans; and
2. Defined contribution plans.
Under a defined benefit plan, the employer specifies an amount of benefits promised to the employee at his or her normal retirement
date. The payments are based on a specified formula that considers age, years of service and salary history, and is adjusted each year
for inflation.
In defined benefit plans, the employer is responsible for maintaining adequate funds to provide the promised benefit, and an actuarial
calculation is required to determine the annual deposit for each year. Among other factors, the actuary considers the age of the
employee, projected earnings of the plan and employee turnover. It helps to remember that defined benefit plans favor older

Question 10

defined benefit plan,

Answer 10

Under a defined benefit plan, the employer specifies an amount of benefits promised to the employee at his or her normal retirement
date. The payments are based on a specified formula that considers age, years of service and salary history, and is adjusted each year
for inflation.
In defined benefit plans, the employer is responsible for maintaining adequate funds to provide the promised benefit, and an actuarial
calculation is required to determine the annual deposit for each year. Among other factors, the actuary considers the age of the
employee, projected earnings of the plan and employee turnover. It helps to remember that defined benefit plans favor older
employees nearing retirement age, and allow for higher benefits for high-salaried owners and key employees.
Defined contribution plans have become much more popular than defined benefit plans because they are generally more flexible and
less expensive for employers to administer. These plans are focused on contributions rather than on the benefits they will pay out.
These plans favor young employees just starting out, with many years to retirement.

Question 11

8. Section 457

Answer 11

8. Section 457
   IRS Section 457 plans are deferred compensation plans available to certain state and local governments, or tax-exempt organizations
   under the Internal Revenue Code (IRC) 501(c). Employers and employees may contribute to the plan up to a specified annual
   maximum through salary reductions (currently $20,500). These plans provide significant tax advantages to their participants: both
   contributions and earnings on the retirement money are tax deferred.
   The specified amount will be forfeited if the employee leaves the employment except in the cases of death, disability or retirement.