What makes a pension plan qualified

The restrictions on contributions you can make to a retirement plan are applied to each employer separately. If you work for a company, the company is an employer. If you are self-employed, you are a separate employer, and can have a separate retirement plan for your business. But be careful. If both you and your employer establish some type of salary reduction plan, you might run up against an overall limit on contributions. The most common types of salary reduction plans are k plans, tax-deferred annuity or b plans these generally cover university professors and public school teachers , and plans sponsored by state and local governments and other tax-exempt organizations.

Although the amount of your salary or compensation you can defer into each of these plans is limited, the law also puts a limit on the total amount you can defer into all such plans, if you happen to be covered by more than one. The overall limit depends on the type of plan you participate in. ERISA requires all plans under its purview generally, qualified plans to include provisions that prohibit the assignment of plan assets to a creditor. The U. Unfortunately, Keogh plans that cover only you -- or you and your partners, but not employees -- are not governed or protected by ERISA.

But even though IRAs are not automatically protected from creditors under federal law, many states have put safeguards in place that specifically protect IRA assets from creditors' claims, whether or not you are in bankruptcy. Also, some state laws contain protective language that is broad enough to protect single-participant Keoghs, as well.

A qualified plan is simply one that is described in Section a of the Tax Code. The most common types of qualified plans are profit sharing plans including k plans , defined benefit plans, and money purchase pension plans. In general, your contributions are not taxed until you withdraw money from the plan. Most retirement plans that you obtain through your job are qualified plans. The information provided on this site is not legal advice, does not constitute a lawyer referral service, and no attorney-client or confidential relationship is or will be formed by use of the site.

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Did your plan satisfy the minimum vesting requirements? Check that any distributions from your plan were computed by applying the vesting schedule in the plan document. Code section provides the minimum vesting requirements. This requires that each employee vest or own, at a minimum, a stated percentage of their interest in the plan each year. Your plan will describe how these forfeitures will be used: either to increase benefits or to fund future benefits for other plan participants.

In a defined benefit plan, forfeitures must not be applied to increase the benefits any employee would otherwise receive under the plan. Code section a 8. Did your plan make required minimum distributions in accordance with section a 9?

Check to make sure that all distributions were made to employees at the correct time and in the correct amounts as described under the plan document. Section a 9 sets out the latest date by which distributions must begin and the minimum amount of the distribution. A plan must provide that the interest of each employee will begin to be distributed to the employee not later than the required beginning date which means, in general, April 1 of the calendar year following the later of:.

At a minimum, the distributions must be evenly spread over the life of the employee or over the lives of the employee and a designated beneficiary or over a period not extending beyond the life expectancy of the employee and a designated beneficiary. Did the plan comply with the consent requirements of section a 11?

Check that distributions prior to normal retirement age or age 62 were made with the consent of the participant. Section a 11 prevents a plan from forcing a distribution on a plan participant prior to the time the participant attains normal retirement age or age If applicable, are distributions from the plan made in accordance with the joint and survivor annuity requirements?

Check to make sure that your plan made all distributions in the form of a joint and survivor annuity unless the spouse waived the right to a joint and survivor annuity or your plan is a profit-sharing plan that is exempt from the joint and survivor annuity requirements.

In general, they require that distributions from the plan be made in the form of a joint and survivor annuity unless the spouse waives the right to a qualified joint and survivor annuity. Code sections a 11 and If there were any distributions made, were participants given the right to a direct rollover? Check that for distributions from your plan eligible to be rolled over to another plan, the distributee was given the option to have the distribution transferred directly to the other plan.

Your plan must comply with this provision in operation. Code section a Check that, other than for participant loans permitted under the terms of your plan, no benefits under the plan were used as collateral for a loan or otherwise assigned or alienated. The plan must provide that benefits provided under the plan may not be assigned or alienated. Did the contributions or benefits provided under the plan comply with the nondiscrimination requirements of section a 4? Determine that the plan satisfies the nondiscrimination test of section a 4.

The contributions or benefits provided under a plan must not discriminate in favor of highly compensated employees. Section a 4 contains the test for nondiscrimination that a qualified plan must satisfy. The purpose of this test is to assure that the benefits provided to highly compensated employees are proportional to those provided to nonhighly compensated employees.

Does the group of employees covered by the plan satisfy section b? Check to make sure that contributions are being made or benefits are accruing for each employee entitled to contributions or benefits under the plan document, and determine that this group of employees satisfies one of the tests below.

In general, b sets out rules on who the plan must cover. In order to satisfy this Code section, a plan must meet one of the following tests:. Note that changes in employee demographics may affect the way that the plan satisfies the coverage tests. In addition, if the employer has been involved in a merger, acquisition or divestiture of a business unit, the plan should be reviewed to assure that it passes one of the section b coverage tests.

If your plan is a defined benefit plan, does it comply with the minimum participation requirements of a 26? Check that your defined benefit plan benefits at least the number of employees set out below. If your plan is a money purchase pension plan or a defined benefit plan, has it complied with the minimum funding requirements of section ?

Check that appropriate contributions were made to the plan. If your plan is a defined benefit plan, an enrolled actuary will have to compute the funding required for the plan and sign Schedule SB of Form setting out the plan's funding status. If your plan is a money purchase pension plan, the contributions required by the plan document must be made in order to satisfy the minimum funding requirements of section Did your plan comply with the requirement that all plan assets are used for the exclusive benefit of employees and their beneficiaries?

A trust is a medium under which the retirement plan assets are accumulated. The employer or employees, or both, contribute to the trust, which forms part of the retirement plan.