One way for employers to build employee loyalty is to offer retirement plans. The Employee Retirement Income Security Act (ERISA), which became effective in 1974, opens the door to qualified plans that protect employees. ERISA guidelines define which retirement plans are qualified and which ones are non-qualified. Here’s a look at how these plans differ.
What is a Qualified Retirement Plan?
Qualified retirement plans are created by employers and meet ERISA requirements. They include profit-sharing plans, 401(k) plans, 403(b) plans, and Keogh (HR-10) plans. In addition, these plans are eligible for certain tax benefits and government protection of investment amounts.
The benefits are offered in addition to earnings from regular retirement plans, including IRAs. In addition, specific plans may allow employees to deduct a percentage of pretax wages to invest in the plan. Over time this money adds up and becomes tax-deferred until it’s time to withdraw.
The plan fits one of two categories: defined-contribution or defined benefit. The former allows the employees to choose their investments, which inevitably affects their retirement amount. By contrast, the latter provides a guaranteed payout amount while the employer takes the risks of picking investments. In addition, entities sponsoring qualified plans are subject to ERISA stipulations on funding.
What is a Non-qualified Retirement Plan?
Non-qualified plans fall short of meeting all ERISA requirements. They include executive bonus plans, deferred-compensation plans, and split-dollar life insurance plans. These plans are typically for executives and key employees whose retirement needs don’t meet ERISA requirements. These plans do not qualify for tax-deferred benefits.
Qualified Vs. Non-qualified Plans
What separates these two plans is how employers make tax deductions. Employees can make tax-deferred contributions with a qualified plan while employers deduct amounts they contribute to the plan. Non-qualified plans, by contrast, are funded by after-tax dollars. Usually, employers are not able to claim deductions for fund contributions.
If an employer offers a qualified plan, employees who meet ERISA requirements must be allowed access to these benefits. Additionally, the benefits must be proportionally equal for all employees who qualify for the plan.
Qualified plans must meet the following criteria:
Disclosure – Participants must be provided with documentation about how the plan is structured and how investments work.
Coverage – A specific number of employees must receive coverage.
Participation – Any employee that meets ERISA requirements must be allowed to participate in the plan.
Vesting – After a certain period of working for the employer under the plan, an employee has the right to the pension without the possibility of forfeiting benefits.
Nondiscrimination – Benefits must be allocated in equal proportions to all employees covered by the plan so that higher-income earners are not favored.
Unlike qualified plans, non-qualified plans can be customized to meet employee needs. For example, contributions made by employers and employees are separate from the employee’s overall wages. A key difference is that qualified plans such as 401(k) and 403(b) plans have more restrictions with fewer deferred amounts.
Since a non-qualified plan is outside of ERISA guidelines, it has fewer tax advantages. These plans, unlike qualified plans, are subject to seizure by the firm’s creditors. Furthermore, non-qualified plans typically expire when an employee quits. The main advantage of a non-qualified plan is greater flexibility.
Conclusion
Employers should consider retirement plan opportunities to attract the right talent. Contact us at Premier Protection for more information about plans suitable for your business.
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