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Qualified plans are established by an employer to provide retirement benefits
for employees and their beneficiaries. A qualified plan may be a defined
benefit plan or a defined contribution plan. Qualified plans allow the employer
a tax deduction for contributing to the plan, and employees do not pay taxes on
plan assets until these assets are distributed; furthermore, earnings on
qualified plans are tax-deferred.
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Learn more about Qualified Plans (Adobe Acrobat File, size:244KB)
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Defined Contribution Plans
A defined contribution plan does not promise a specific amount of benefit at
retirement. Employees or employers (or both) contribute to these plans.
Typically, the contribution will be a percentage of compensation up to a
certain dollar amount. Depending on the plan type, the contributions may or may
not be made each year, but they are invested on the employee’s behalf, and the
benefits paid to employees are based on contributions and any earnings or loss.
Employers are not required to make up for any loss on investments. Examples of
defined contribution plans include:
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401(k) Plan
A 401(k) plan is a qualified plan that allows employees to defer receiving
compensation in order to have the amount contributed to the plan. This
arrangement is commonly referred to as a cash or deferred arrangement (CODA).
Contributions deferred by employees are referred to as elective deferrals,
which are typically made to the 401(k) plan on a pretax basis.
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403(b) Plan
A 403(b) plan is a retirement plan for certain employees of public schools,
certain tax-exempt organizations, and certain ministers. Individual 403(b)
accounts are established and maintained by eligible employees.
Learn more about 403(b) plan
(Adobe Acrobat File, size:123KB)
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Profit Sharing Plans
A profit-sharing plan is used for sharing profits from the business with
employees, but an employer may make profit-sharing contributions regardless of
whether the business had profits for the year. Contributions to the plan are
discretionary, which means that the employer may choose not to contribute to
the plan every year. Despite this flexibility, however, the employer must take
care not to allow too many consecutive years to pass before contributions are
made. The IRS does not specify how many consecutive years are unacceptable but
does indicate that contributions to the plan must be substantial and recurring.
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Money Purchase Pension Plans
In general, an employer has more flexibility in contributing to a
profit-sharing plan than to a money purchase pension plan or a defined benefit
plan.
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Employee Stock Option Plans (ESOPs)
Employee stock ownership plans (ESOPs) are a form of defined contribution plan
by which the investments are primarily in the employer's stock. Congress
authorized the creation of ESOPs as one method of encouraging employee
participation in corporate ownership.
Defined Benefit Plans
Under a defined benefit plan, employees’ retirement benefits are predetermined
by his or her compensation, years of service and age. The employer makes
contributions that, based on actuarial assumptions including projected growth
of investments, are required to reach the predetermined retirement benefit.
Should the performance fall below the projected amount, the employer is
required to make additional contributions to make up for the shortfall. A
412(i) plan is an example of a defined benefit plan.
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Resources for Small Business Owners
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