A qualified retirement plan is a plan that is eligible for certain tax benefits. There are two types of qualified retirement plans: defined benefit plans and defined contribution plans. A defined benefit plan is a qualified retirement plan in which an employer promises an end amount; essentially, a defined benefit plan is a pension plan. A defined contribution does not promise a specific end amount but promises a specific annual contribution. There are four types of defined benefit plans and seven types of defined contribution plans.
In class we covered the differences between defined benefit and defined contribution plans. One of the differences we covered is who bears the investment risk. In a defined benefit plan the employer bears the risk because said employer promised a specific end amount. Defined contribution plan risk falls on the employee.
In order for a retirement plan to be “qualified” it must beet certain specifications. One requirement is that the employee must be at least twenty-one and have been employed for one full year. Coverage is also requirement to be considered “qualified”. There are three different calculations to determine whether or not the plan is eligible: general safe harbor test, ratio percentage test, and average benefits percentage test. 70% or more is considered passing. In addition to the calculation, a defined benefit plan must pass the 50/40-test meaning that the plan must have either fifty eligible employees or 40% of employees with at least two participants. A specific vesting schedule is also important to be considered qualifying. There are also special qualifications for top-heavy plans or COSAs. In addition to all other requirements there is also a limit of $255,000 (2013) for benefits.
This week’s class was very interesting and informative. I know, without a doubt, that I will be using qualified retirement plans as tools for clients. I also know that I will be offered a form of a qualified retirement plan in my own career.
In class we covered the differences between defined benefit and defined contribution plans. One of the differences we covered is who bears the investment risk. In a defined benefit plan the employer bears the risk because said employer promised a specific end amount. Defined contribution plan risk falls on the employee.
In order for a retirement plan to be “qualified” it must beet certain specifications. One requirement is that the employee must be at least twenty-one and have been employed for one full year. Coverage is also requirement to be considered “qualified”. There are three different calculations to determine whether or not the plan is eligible: general safe harbor test, ratio percentage test, and average benefits percentage test. 70% or more is considered passing. In addition to the calculation, a defined benefit plan must pass the 50/40-test meaning that the plan must have either fifty eligible employees or 40% of employees with at least two participants. A specific vesting schedule is also important to be considered qualifying. There are also special qualifications for top-heavy plans or COSAs. In addition to all other requirements there is also a limit of $255,000 (2013) for benefits.
This week’s class was very interesting and informative. I know, without a doubt, that I will be using qualified retirement plans as tools for clients. I also know that I will be offered a form of a qualified retirement plan in my own career.