Retirement plans are formal contracts to provide retirement benefits. Employers often establish retirement plans to attract prospective employees and to keep current employees. Employers have an incentive to set up "qualified" plans because they get tax benefits in the process.
A "qualified" retirement plan is one that complies with applicable law so that taxes are deferred on contributions and earnings thereon until withdrawn. The federal law that governs such plans is the Employee Retirement Income Security Act (ERISA). ERISA establishes non-discrimination rules and other safeguards to protect employee benefits. NOTE: Public Sector Employer Retirement Plans are not subject to ERISA.
It is also possible to set up "non-qualified" plans, which means that they do not qualify for the same tax benefits. When employers establish such plans, they are usually for highly compensated executives.
Examples of "Qualified" Retirement Plans�
� 401(k) Plans
A 401(k) plan is a type of deferred compensation plan. You may annually contribute roughly $10,000 of your earnings. Your employer may match a percentage of what you contribute. You are not taxed on contributions until you receive distributions. There can be stiff penalties for withdrawals before age of 59-1/2. A great incentive to participate is that contributions can grow and accumulate until withdrawal, all on a pre-tax basis.
� Profit Sharing Plans
A profit sharing plan allows an employer to supplement other retirement benefits by letting employees share in profits. Contributions are at the discretion of the employer. If contributions are made, however, they must be on a non-discriminatory basis. Usually, an employer makes contributions based on a percentage of total annual payroll.
� Pension Plans
The two basic qualified pension plans are:
Defined benefit plans, which provide retirement benefits where the employer promises retirees a pension in a specific amount, with the benefit set by a formula based on years of service X final average salary X a percentage figure.
The employer must contribute to the plan on a regular basis so that sufficient funds are available to pay required benefits to all retired employees as they come due. The employer bears the risk of having sufficient funds to pay the pensions.
Defined contribution plans, which require employer to contribute only a specific amounts to their plans. Employees are also typically required to make contributions. Each employee has an account, and has available at retirement the amount of money that is then in this account. The employee bears the investment risk.
DEM Legal and Consulting Services can assist you with quality legal advice and representation regarding the interpretation of defined benefit pension plans to help you avoid expensive lawsuits and mistakes. As General Counsel to a public pension fund, Ms. Eaton May has the experience and expertise in guiding public sector organizations through the tax and legal requirements of defined benefit plans, open meeting laws, public records act, FPPC requirements, qualified domestic relations orders, governance and strategic business planning.