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A qualified retirement plan is an employer sponsored plan that meets the requirements by the Internal Revenue Service (IRS). Qualified plans must provide for all eligible employees equivalently. Employers may take a tax deduction for contributions to a qualified plan and in some plans employees may make tax deferred contributions. No tax is due on contributions or earnings until money is withdrawn from the plan.
Money Purchase Plans, Profit Sharing Plans and the 401(k)s allow for true participant self-direction, thereby reducing the employer’s fiduciary responsibilities. Place Trade offers both Traditional 401(k)s as well as Individual 401(k)s.
For more information visit www.irs.gov.
Individual 401-K - An Owner Only 401(K)
An Individual 401(k) has the same characteristics as a sole proprietor Profit Sharing Plan.
- An Individual 401(k) has the same characteristics as a sole proprietor Profit Sharing Plan.
- Employer/employee can defer up to 20% of salary, up to $46,000 annual addition limit in 2008 and $49,000 in 2009.
- Catch up contribution for 50 and older is in addition to the annual limit.
- A qualified plan can permit 401k participants over 50 to defer an extra $5,000 (in 2008) over and above the $46,000 limit [for a maximum of $51,000 in 2008] and $5,500 (in 2009) over the $49,000 limit [for a maximum of $54,500 in 2009].
- Allows older participants to maximize contributions to save for upcoming retirement.
- Visit www.irs.com for more details.
General Characteristics
Qualified Profit Sharing Plans and Money Purchase Plans
Overview:
- Plans can be combined.
- Definite formula for contributions.
- Maximum contribution up to 25% of compensation.
- • Maximum contribution up to 25% of compensation (depending on the allocation method that is used, one could receive up to the lesser of 100% of compensation or $46,000).
- Can fund the plan up to tax filing deadline with extensions, but plan must be established by year-end.
- Can exclude part time employees (<1000 hours of service/year) or require up to 2 years of service to participate.
- Can have a vesting schedule.
Qualified Profit Sharing Plans
- Flexibility in funding - Employer may vary contributions from year to year
- Up to 25% of plan compensation deductibility for employer
- Contributions may be linked to profits
- In-service distributions are permitted
- Flexibility in funding up to 25% of compensation
- Loans available
Qualified Money Purchase Plans
- Employer MUST contribute each year
- Contributions are fixed – not linked to profits
- Up to 25% deductibility for employer
- No in-service distributions
Eligibility
Employer Eligibility
Eligible employers include corporations, partnerships, non-profit organizations, “S” corporations, and sole proprietors (self employed).
Employee Eligibility
An employer can always choose to make all employees eligible to participate in a qualified plan, however the employer is permitted to adopt the following eligibility requirements:
- Employee must have attained the age of 21.
- Employee must have completed two years of service if 100% vesting is elected, or one year of service if a vesting schedule is elected.
- Employer can require up to 1000 hours of service to qualify as a year of service.
Deductibility limits can be confusing and tax laws are frequently changing. It is always best to review your specific situation and/or circumstances with a qualified tax advisor.