Qualified Retirement Plans
Frequently Asked Questions

What are the four fundamental requirements of a qualified plan?
A qualified retirement plan must be (1) a definite written program that must be (2) communicated to the employees. It must also be (3) a permanent plan and (4) must prohibit the use or diversion of funds for purposes other than the exclusive benefit of employees or their beneficiaries.
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If a plan must be permanent, does it have to be without end?
Qualified plans have been ruled to not be a contract with employees. All plans may be terminated by the plan sponsor.
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What are the tax ramifications of qualified plans?
Employer contributions to qualified plans are tax deductible by the employer plan sponsor. Earnings inside the plan are tax free. Distributions from the plan are income taxable to the recipient unless rolled over to an IRA or other qualified plan.
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What types of employers are eligible to sponsor a qualified retirement plan?
All employers may sponsor a qualified plan, including sole proprietorships, partnerships, limited liability companies, C Corporations and S Corporations. This is true even if the company has only one employee.

May a qualified plan purchase life insurance on the lives on the lives of participants for the benefit of their beneficiaries?
Yes. A death benefit may be provided with life insurance so long as the benefit is incidental to the plan, as defined in IRS regulations. In fact, qualified plans are one of the few places where life insurance can be purchased with pre-tax dollars.
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When can a plan be effective?
The plan must be formally adopted by executing the adoption agreement by the last day of the plan year. Plan corpus must be established by opening an account (such as with a bank) in the name of the plan by the same date.
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Can some employees be excluded from the plan?
Yes. There is a statutory exclusion for those employees who have not yet attained age 21 and for employees covered by a collective bargaining agreement. Other employees may be excluded provided the plan can satisfy discrimination test.
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What happens to the plan when the owner of the company reaches retirement age?
While it doesn't have to, most plans terminate when the owner retires. All participants are paid out their vested benefits after the IRS approves the plan termination.

What is the maximum compensation that can be considered for qualified plans?
For years beginning after 1999, the maximum considered annual compensation is $170,000.
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When are nonvested funds forfeited?
Nonvested funds are forfeited at the earlier of when an employee receives a distribution, or after the employee incurs five consecutive one-year breaks in service.

 

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