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Background
Qualified plans are found under Section 401 of the Internal Revenue Code. These plans are subject to the provisions of ERISA and must be maintained under those rules in order to preserve their tax status. The types of retirement plans are varied from the Profit Sharing plan where the employer decides how much to put in the plan to the more complex Defined Benefit plans where the actuary determines the funding.
Basic Provisions
Eligibility:
All retirement plans must state who will be eligible for the benefits under the plan. These eligibility requirements must be applied for all of the employees of the employer. Generally, employees who are under age 21, who have less than 1 year of service, or who work less than 1,000 hours per year may be excluded. Other statutory exclusions cover collectively bargained employees, and non-resident aliens with no US income. A qualified plan may exclude other groups of employees, but it must be done on a non-discriminatory basis.
Vesting:
Retirement plans must stipulate the rate at which benefits under the plan become vested under the plan. These benefits that are non-forfeitable. These benefits will not be subject to forfeiture upon the termination of service of the employee. The maximum full vesting under an ERISA plan is either a 5 year cliff where the participant is not vested until 5 years of service, or a 7 year graded where the participant achieves 20% vesting after 3 years and an additional 20% each year until the 7th year. Some plans will require faster vesting because of delayed eligibility requirements or because the plan has more than 60% of the value of the benefit in the hands of the "key" employees.
Normal Retirement:
Qualified retirement plans have an age stated at which the participant may draw benefits. This date the normal retirement date under the plan. Generally, the age is 65, but it may be as early as age 55, or as late as 5 years of participation in the plan or age 65 whichever is later.
Compensation:
IRS code section 415 limits compensation that may be included for determining benefits under a retirement plan to $230,000 in 2008. This amount is indexed each year for inflation. Compensation may be limited, but it must be done on a non-discriminatory basis and may not favor the highly compensated employee group.
Maximum Deductions:
The maximum deductions available under a qualified retirement plan is determined by the type of plan and the amount of compensation paid to the individuals covered under the plan. Under a defined contribution plan the maximum employer contribution is limited to 25% of the payroll for the employees covered under the plan. Under the Defined Benefit plan the maximum is determined by the funding requirements under the plan, and may exceed the 25% limitation. The maximum contribution by the employer does not include any salary deferrals made by employees under a CODA (Cash or Deferred Arrangement), these plans are generally a 401(k), 403(b) or 457 type plan.
Coverage:
Qualified retirement plans must cover at least 70% of the percent of the non-highly compensated employees if 100% of the highly compensated employees are covered. If less than 100% of the highly compensated employees are covered, then the minimum coverage requirement becomes 70% of the percent of highly compensated employees covered.
Maximum Salary Deferrals:
The maximum salary deferrals for 2008 for either a 401(k), 403(b), or Section 457 plan is $15,500. Participants who are over age 50, or will become age 50 during the year may defer an additional $5,000 as a "catch up" contribution.