Qualified Retirement Plans Introduction
The Henssler Financial Group Position Paper

One of the most important and meaningful benefits an employer can offer is a retirement plan. This is true whether the employer is a large corporation or a small business. Retirement plans allow business owners and employees to save money in tax-deferred accounts, delaying income tax payments until funds are withdrawn at some future date. In many cases, a qualified retirement plan is the most appropriate type of plan. Many types of qualified retirement plans exist, including defined contribution plans (money purchase, target benefit, profit sharing, Keogh) and defined benefit plans. These various plans will be covered in greater detail in future weeks.

Qualified vs. Non-Qualified Retirement Plan

A qualified retirement plan (QRP) receives tax benefits not available to a non-qualified plan, but is subject to very strict government regulations. The employer receives a deduction when contributions are made to the plan. At least 70% of non-highly compensated employees must be covered by the plan, and government-set vesting schedules must be followed. Earnings accumulate tax-deferred and will be taxable to the individual at the time of distribution. No income tax deduction is available for the employer at the time of distribution. Independent contractors or directors are not eligible for coverage under a QRP.

Non-qualified retirement plans receive fewer tax benefits, but are not subject to as many government regulations. Most of the time, non-qualified retirement plans are designed for executives or key employees, and not for a broader group of employees. Benefits provided to employees can go beyond the limits allowed in qualified plans. Any earnings within the plan currently will be taxable to the employer, and taxable to the employee when distributed as benefits. However, the employer will be entitled to an income tax deduction at the time of distribution. Independent contractors and directors are eligible for coverage under a non-qualified retirement plan, unlike a QRP.

Benefits of Qualified Retirement Plans

• Any time a contribution is made to a plan, contributions must be made on all participants' behalf. (This could also be considered a drawback for employers.)
  
• All contributions are tax deductible to the employer for the year the contribution is made.
  
• In certain plans, annual contributions do not have to be made to the plan by the employer. (Although for profit sharing plans, contributions must be "substantial and recurring" or the IRS may deem the plan as terminated.)
  
• Earnings on any investment within the plan are tax-exempt to the employer, and tax-deferred to the employee.
  
• Hardship loans are available in most plans.
  
• Contribution limits are considerably higher in a QRP than in an IRA.

Drawbacks of Qualified Retirement Plans

• In certain plans, annual contributions are required to be made whether or not the employer is profitable.
  
• In most plans, benefits are not guaranteed.
  
• Plan participants face a 10% withdrawal penalty if distributions occur before the participant reaches age 59½ (age 55, in some cases.)
  
• Administration costs can be considerably higher in a QRP than in other retirement plans, such as a SEP.

Reasons for Different Types of Plans

Why do so many types of plans exist? Each different plan is designed to accomplish different employer objectives. Some plans are designed primarily to benefit key employees or business owners, while others are designed as an incentive to rank-and-file employees. Some plans are designed to provide a guaranteed benefit, while most provide a benefit that is determined by the performance of the investments within the plan. Some plans require an annual contribution by the employer. Some plans, such as a defined benefit plan, generally have higher administration costs than other types of plans, but provide more targeted benefits. Some plans, such as a 401(k) plan, allow employees to make individual investment choices. Other plans, such as profit sharing plans, often do not allow employees to determine how funds are invested.

It is important to make sure the type of plan chosen meets the objectives of the employer. In the coming weeks, we will cover these various types of qualified plans, and discuss the benefits and drawbacks of each.

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