A qualified retirement plan meets the requirements of Internal Revenue Code Section 401(a) of the Internal Revenue Service (IRS) and is thus eligible to receive certain tax benefits. Qualified retirement plans give employers a tax break for the contributions they make for their employees. Those plans that allow employees to defer a portion of their salaries into the plan can also reduce employees’ present income-tax liability by reducing taxable income. It is one tool that can help employers attract and retain good employees.
Qualified retirement plans that are employer-sponsored must also satisfy minimum standards set by the Employment Retirement Income Security Act of 1974 (ERISA). ERISA protects plan participants and their assets from potential mistreatment.
More specific Qualified Retirement Plans include, but not limited as below.
SEP IRA: Simplified Employee Pension IRA is an employer sponsored retirement plan. The employer makes 100% contributions to the plan. This plan is more widely used for self-employed, sole proprietor and small businesses due to its simplicity to set-up.
SIMPLE IRA: Savings Incentive Match Plans for Employees may be good for businesses with 2-100 employees. Both employees and employers fund the plan. Employers match contributions are required. No Third Party Administrator needed.
Solo 401K: Also known as Individual 401(K) is designed for self-employed or business owners with no full-time employees. The plan offers higher contribution limit, Roth option, and allows the individual to take loans from the plan.
Safe Harbor 401K: Employers are required to match to employees’ contributions to retirement funds and matches are vested immediately. Adding the Safe Harbor provision to 401(k) will automatically pass most annual compliance tests when mandatory contribution and participant disclosure requirements are met.
Profit Sharing Plan: A pre-tax contribution compensation plan for employees (owners and/ or key employees) from a company’s profits. It allows flexible contributions since its profit sharing plan and contribution is discretionary each year.
Defined Benefit Plan: Pension like and employer-based retirement plans. Popular for high income self-employed or high income business owners with few employees. Contributions are based on the employee’s current income, projected retirement income and time frame to retirement.