Qualified Retirement Plan Types, Characteristics and Purchasers Flashcards
Defined Benefit Plan
A defined benefit plan provides employees with a fixed and known benefit at retirement, the amount of which depends upon length of service and highest salary attained.
Defined Contribution Plan
A defined contribution plan provides employees with a retirement benefit based on the value of the employee’s account at retirement.
Savings Incentive Match Plan for Employees (S.I.M.P.L.E.)
A SIMPLE plan may be established either as an IRA or a 401(k) plan. The employer’s contribution must be immediately vested at 100%. This means that the employee is entitled to all the employers’ contributions immediately.
SIMPLE plans are only available to companies that have fewer than 100 employees and must be the only type of plan the company has available for the employees. An advantage of a SIMPLE plan is the elimination of high administrative costs.
Simplified Employee Pensions (SEPs)
Simplified Employee Pensions (SEPs) are set up by any private sector company that does not offer another type of qualified plan. This plan is very popular with self-employed individuals. The SEP plan uses employer-funded IRAs. The employer makes contributions and deducts the payments as a business expense. All distributions to employees are taxable upon receipt.
Self-Employed Plans (HR-10 or KEOGH Plans)
KEOGH Plans, or HR-10 Plans, are available to unincorporated sole proprietors and their eligible employees. Silent partners who are primarily investors and are not involved in the daily operations are not eligible.
Profit-Sharing and 401(k) Plans
A 401(k) Plan is a defined contribution plan for employees of for-profit companies. It is an elective deferral plan or salary reduction.
401(k) Plans also can be profit-sharing plans, allowing an employee a choice between taking income in cash or putting the income into a qualified plan and deferring that portion of income.
If employees elect a defined contribution plan:
Employees define their contribution amount as a percentage of income or a fixed dollar amount per payroll period. The employer must deduct that amount from pay and forward to the plan custodian on a timely basis. Participants typically invest in a portfolio of mutual funds. Employers may contribute and match funds to participant accounts as long as the contribution formula is not discriminatory.
If the plan is incorporated as a profit-sharing plan:
The employer defines the circumstances under which profit-based contributions will be made, and contributions must generally be made in at least 3 out of 5 consecutive years.
403b Tax-Sheltered Annuities (TSAs)
Tax-Sheltered Annuities (TSA) are qualified annuity plans benefitting employees of public schools under the Internal Revenue Code (IRC) Section 403(b), as well as other nonprofit organizations qualified under Section 501(c)(3). Employees do not make direct payments to the retirement fund.
These accounts are owned by the employee, are nonforfeitable, and will be paid upon death, retirement, or termination of the employee. Contributions are pretax and the interest earned grows tax deferred.
