What does qualified plan mean

Early withdrawals are allowed before retirement, although the employee must meet certain requirements to avoid paying a penalty. Defined benefit plans are not as common. With these plans, the employee is promised a certain amount of money due at the time of retirement, regardless of the contributions made by the employee.

These plans are usually either pension plans or annuities. Defined-benefit plans put more of a burden on the employer to be sure to contribute enough so that these benefits can be paid upon retirement. For instance, if your employer offers a k plan, you can decide how much of your income you want to contribute to that k. Contributions are tax-free, and are made during each pay period. In addition, many employers also match employee contributions up to a certain percentage.

If your employer matches 3 percent of your contributions, it is in your best interest to contribute at least that much to take advantage of the full employer contribution. Looking for more retirement plan information?

Find the advice you need to make sure you save enough for retirement. The money from your employer match may be required to vest, potentially for years, before it becomes entirely yours. However, it's not a qualified plan. One significant difference between qualified plans and IRAs is that qualified plans are established by businesses, while certain types of IRAs -- traditional or Roth IRAs -- are established by individuals.

That means you can set up a traditional or Roth IRA for yourself, whether or not your employer has established a qualified plan for you at work.

For example, the employer might be a corporation, a sole proprietor or a partnership. Generally, yes. The restrictions on contributions you can make to a retirement plan are applied to each employer separately. If you work for a company, the company is an employer. If you are self-employed, you are a separate employer, and can have a separate retirement plan for your business.

But be careful. If both you and your employer establish some type of salary reduction plan, you might run up against an overall limit on contributions. The most common types of salary reduction plans are k plans, tax-deferred annuity or b plans these generally cover university professors and public school teachers , and plans sponsored by state and local governments and other tax-exempt organizations.

Although the amount of your salary or compensation you can defer into each of these plans is limited, the law also puts a limit on the total amount you can defer into all such plans, if you happen to be covered by more than one. The overall limit depends on the type of plan you participate in. ERISA requires all plans under its purview generally, qualified plans to include provisions that prohibit the assignment of plan assets to a creditor.

The U. Unfortunately, Keogh plans that cover only you -- or you and your partners, but not employees -- are not governed or protected by ERISA. But even though IRAs are not automatically protected from creditors under federal law, many states have put safeguards in place that specifically protect IRA assets from creditors' claims, whether or not you are in bankruptcy. Also, some state laws contain protective language that is broad enough to protect single-participant Keoghs, as well.

A qualified plan is simply one that is described in Section a of the Tax Code. The most common types of qualified plans are profit sharing plans including k plans , defined benefit plans, and money purchase pension plans. In general, your contributions are not taxed until you withdraw money from the plan.

Most retirement plans that you obtain through your job are qualified plans. Your plan may have other operational requirements that need to be monitored. Note that problems often arise from changes in personnel, procedures, payroll systems, or new service providers such as accountants, attorneys, actuaries or third-party plan administrators. Employers that have experienced any of these changes should give special scrutiny to operational requirements affected by the change.

Does your plan document satisfy the minimum participation requirements of section a? Check that all appropriate employees began participation on the correct date in accordance with section a and the plan document. Section a 1 of the Internal Revenue Code Code sets forth the minimum age and service requirements for a qualified retirement plan. In general, a plan cannot require, as a condition of participation, that an employee complete a period of service with the employer extending beyond the later of:.

Section a 4 sets forth the rules for plan entry dates the dates when an eligible employee must begin participation. Under Code section a 4 , a plan is not qualified unless it provides that an employee who is otherwise eligible to participate under the terms of the plan commences participation no later than the earlier of:. In operation, did you include in the plan all the employees described in the plan document?

Did you give them the benefits described in the plan? Your plan document describes who is covered under your plan, i. You must operate your plan strictly in accordance with the terms of your plan document; that is, you must cover the employees that your plan document describes as being covered and when the plan document says they should be covered, and you must provide them the contributions or benefits set out in the plan document.

Even if the terms of your plan do not reflect your intent, you must follow the terms of your plan. Of course, the terms of your plan may be amended by a plan amendment. But see item 3, below, with respect to the prohibition against cutting back benefits that your employees have already accrued or to which they are already entitled under the plan.

If the plan has been amended, did the amendment result in a cutback of accrued benefits prohibited by section d 6? Make sure that no plan amendment reduced any participant's benefit accrued before the amendment. In a defined contribution plan a k , profit-sharing, money purchase plan, etc. A plan amendment that has the effect of eliminating or reducing an early retirement benefit or a retirement-type subsidy, or eliminating an optional form of benefit, with respect to benefits attributable to service before the amendment will be treated as reducing accrued benefits.

If your plan is a k plan or contains a k cash or deferred arrangement CODA , does it comply with the requirements of k? Check that your k plan complies with section k , including the Actual Deferral Percentage test and the distribution requirements. Under a CODA, participants may elect to have their employer contribute a specific amount to the plan in lieu of receiving it in cash as wages.

In order to satisfy the requirements of section k , the plan must satisfy the Actual Deferral Percentage ADP test. The ADP test requires that the deferral of income into the CODA by highly compensated employees be proportional to that for nonhighly compensated employees. The plan document must state that the Actual Deferral Percentage ADP test of Code section k 3 will be satisfied and must actually satisfy the test in operation.

Additionally, the law has changed to allow an employer not to perform an ADP test if it makes a safe harbor contribution to the plan on behalf of employees.

In addition to the safe harbor contribution, certain notice requirements are also applicable. Determine that your plan satisfied the Actual Contribution Percentage test each year. The plan document must state that the Actual Contribution Percentage ACP test of Code section m 2 will be satisfied and must actually satisfy the test in operation. The ACP test requires that the employee and matching contributions provided for highly compensated employees be proportional to those for nonhighly compensated employees.

Code section m does not apply to a defined benefit plan unless employee contributions to the plan are allocated to a separate account. Similar to the ADP safe harbor contribution, a safe harbor exists for the ACP test if the ADP safe harbor contribution is made and timely notice is provided to participants. Additionally, the level of matching contributions is limited in order for the ACP safe harbor to apply.

If your plan provides for elective deferrals, does it limit those deferrals to the section g limit? Check that in operation, elective deferrals made for each employee are limited to the section g limit. Elective deferrals are amounts that employees elect to contribute to a retirement plan out of their compensation. A plan that provides for elective deferrals, for example a k plan, must provide that for each participant the amount of elective deferrals under the plan and all other plans, contracts, or arrangements of an employer maintaining the plan may not exceed the amount of the limitation in effect under Code section g 1 Code section a In addition to the plan terms providing that elective deferrals must satisfy the requirements of Code section g , elective deferrals must satisfy these requirements in operation.

The law allows participants who are age 50 and over to make additional elective deferrals to the plan over the statutory limit. Did your plan limit contributions or benefits so they do not exceed the limitation set forth in section ?

Check to make sure that contributions made to any of your employees or benefits accrued by your employees, if your plan is a defined benefit plan were appropriately limited by the limitations in accordance with the plan document.

The limitations on benefits and contributions for retirement plans are set forth in Code section Was the compensation of each employee taken into account under the plan limited to the section a 17 limitation?

Check that for any employee only compensation up to the maximum compensation limit for the year was taken into account under the plan for purposes of computing the employee's contributions and benefits.