Employment-based retirement plans have changed drastically during the past 30 years. Companies are moving away from defined-benefit plans, such as traditional pension plans, in favor of defined-contribution plans, such as 401(k)s.
According to data from the Bureau of Labor Statistics, in 1992, 32 percent of private-sector workers participated in a defined-benefit plan but by 2005 only 21 percent participated in such a plan. By contrast, in 1992, 35 percent of private-sector workers participated but in 2005, that number had risen to 42 percent.
Qualified retirement plans are those that meet the statutory and regulatory requirements to receive tax-favored treatment by the IRS. All qualified retirement plans are covered by the ERISA. There are two general categories of qualified retirement plans – defined-benefit plans (such as traditional pensions) and defined-contribution plans (such as 401(k)s).
Defined-benefit plans
In defined-benefit plans, predetermined formulas are used to calculate the level of benefits that will be payable beginning at retirement, usually on a monthly basis.
Defined-contribution plans
In defined-contribution plans, the level of future benefits depends on how much money the employee and employer contribute to the plan and the interest earned over time. Defined-contribution plans include 401(k)s, 403(b)s, 457s, profit sharing, simplified employee pension plans (SEPs), savings incentive match plans for employees (SIMPLE), and employee stock ownership plans (ESOPs).
Nonqualified retirement plans
These plans are typically provided as extra compensation to key executives and are exempt from many of the ERISA’s requirements. They include such things as golden parachutes, stock options, and top-hat plans. Although they do not carry the same tax benefits as qualified plans, they are subject to their own sets of rules, including the requirements of the Internal Revenue Code section 409A.
Retirement plan requirements
Federal law sets may requirements for retirement plans including minimum funding, contribution limits, and nondiscrimination provisions.
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