Among the variety of retirement plans you can pursue, some qualify for tax deferral by the regulations of the federal government, and others don’t. The federal government passed the Employee Retirement Income Security Act (ERISA) regulation in 1974. This legislation and its requirements determine whether a retirement plan offered by employers or an employee organization (such as a union) qualifies for tax deferral of investment and interest until retirement age.
Looking at list of qualified retirement plans requirement
To qualify for tax-deferred treatment, the retirement plan must meet certain requirements, outlined in the following sections.
Qualification of retirement programs refers to standards set by ERISA and, therefore, applies only to programs offered by employers or employee organizations such as unions.
If your employer offers a pension or profit sharing plan or some other type of qualified retirement plan, your employer probably designed it to comply with all the federal requirements. Take a look at each of these federal requirements and how the plans are designed to meet them.
Participation: The plan must cover a broad group of employees, not just executives and owners. To avoid discrimination against average employees, ERISA requires that the waiting period for a new employee to become eligible in the retirement plan can’t exceed one year of service or more than 1,000 hours.
Vesting: Your vesting percentage is the amount of your retirement account balance that you own, even if you stop participating in the retirement plan today. You are always 100 percent vested in money that you have contributed to the plan, but you become vested in contributions made by the employer according to the vesting schedule set forth in the plan.
Nondiscrimination: A general theme of ERISA is that a qualified plan may not discriminate in favor of executives, owners, or highly compensated employees (any employee who is either at least a 5 percent owner or who earned $80,000 in compensation). If your plan is qualified with ERISA, it includes highly compensated employees and owners as well as “average” employees.
Funding: Retirement contributions from both employers and employees must be kept in a trust for the exclusive use of the qualified retirement plan participants. Also, an actuary must specify how much money must go into the plan each year in order to fund the benefits it must pay in the future. (An actuary is a professional highly skilled in mathematical techniques for measuring risk and reward.)
Timing of contributions: ERISA requires that the contributions to the retirement fund be made within specified time frames.
Contribution and benefit limits: ERISA provides strict limits on both benefits and contributions the employer may make to ensure that business owners, executives, and highly paid employees don’t use the plan just as a tax shelter.
Reporting and communication: ERISA requires that participating employees receive a statement that explains the performance of their retirement accounts at least once a year. Most companies send out statements more often — usually quarterly or monthly. In addition, if you are participating in a company retirement plan, you have a right to see the actual plan document and a summary plan description any time you request it from your human resources department. The plan is a highly technical, legal document that may be difficult to read and understand. The summary plan description, however, is more user-friendly and easier to read.
The summary plan description is a very valuable resource that you should study if you have questions about how your plan operates. Actually, the description is so important that you should read it even if you don’t have questions about how your plan operates!
Distributions from plans: Distributions are withdrawals of money from the retirement plan, either at or before retirement. You can roll over the distributions from qualified plans to other plans or to IRAs. The rules governing distributions are very complicated. As you approach retirement, you may want to seek professional advice about how you should handle your distributions. Many employers offer such assistance, but you can talk with your own financial adviser to avoid confusion and tax penalties.
Distributions from retirement plans are subject to complicated tax laws and regulations that change frequently. Consult a tax or financial professional.
