What are Qualified Retirement Plans?

Qualified Retirement Plans

  • What are they?
  • Tax advantages
  • Different types

Bauman, Noonan and AssociatesEmployer sponsored retirement plans are often referred to as qualified plans because by following certain guidelines they become “qualified” to receive advantageous tax treatment. That is, employer retirement plan contributions are a deductible business expense in the year that they are made but are not current taxable income to the plan participant who receives them. Taxes are paid by the participant when the money is ultimately withdrawn from the plan.

Qualified plans are characterized as being either defined contribution plans or defined benefit plans. Defined contributions plans specify the employer’s annual contributions while defined benefit plans specify the participant’s benefit at retirement. Qualified plans are further characterized as being either pension or profit sharing plans. Pension plan contributions are mandatory while profit sharing contributions are made at the discretion of the employer.

All defined benefit plans are pension plans, while most defined contribution plans are profit sharing plans.