Lecture 20 Introduction to Qualified Retirement Plans What does it mean to be qualified? Taxation Management objectives in pension plan design Government’s role Qualified plan characteristics Classification of qualified plans

What Does It Mean To Be Qualified? Meets the applicable government regulations Receives favorable tax treatment

Taxation Under a qualified plan, the employer gets a tax deduction when the contributions are made to the plan The employee is not taxed on the contributions The investment income on the assets in the plan is not taxed The employee is taxed on benefits when they are received The tax break is the lag between the deduction for the employer and the taxation for the employee several (or many) years later

Management Objectives in Pension Plan Design Help employees with retirement saving Tax deferral for owners and highly compensated employees Help recruit, retain and retire employees Encourage productivity directly Discourage collective bargaining

Government’s Role Set rules for favorable tax treatment “Tax revenue loss” issue Discrimination in favor of HCEs Encouraging private saving

Qualified Plan Characteristics Eligibility (Chapter 19) –Minimum age cannot be over 21 –Service requirement cannot be more than 1 –Must cover at least 70% of non-HCEs Nondiscrimination in benefits and contributions (Chapter 20) Funding requirements Vesting requirements (Chapter 21)

Qualified Plan Characteristics - (cont.) Limitations on benefits and contributions (Chapter 25) –Pension limited to $90,000 (indexed) –Contributions limited to $30,000 –Benefits limited to first $150,000 (indexed) of compensation Payout restrictions –Tax penalty (10%) for withdrawal of funds before age 59 1/2, unless for death or disability Top-heavy rules

Classification of Qualified Plans Pension or profit-sharing plans Defined benefit or defined contribution plans Types of plans –Defined benefit pension plan –Cash-balance pension plan –Target-benefit pension plan –Money-purchase pension plan –Profit-sharing plan –Section 401(k) plan –Stock bonus plan –Employee Stock Ownership Plan (ESOP)