Are qualified plans tax-deductible?

Contributions are currently not taxable for participants. Contributions made on behalf of employees can be paid with dollars that would otherwise have been spent on taxes. The main difference between the two plans is the tax treatment of deductions by employers, but there are other differences as well. Qualified plans have tax-deferred contributions from the employee, and employers can deduct the amounts they contribute to the plan.

Non-qualified plans use after-tax money to fund them, and in most cases, employers can't ask for your contributions as a tax deduction. A trust is a medium in which retirement plan assets are accumulated. The employer or employees, or both, contribute to the trust, which is part of the retirement plan. The assets are held in the trust until they are distributed to employees or their beneficiaries in accordance with the plan's provisions.

Trust must be maintained for the sole benefit of employees and their beneficiaries. Section 401 (a) of the Code sets out the requirements that a trust must meet in order to “qualify for favorable tax treatment.”. When a trust is “qualified” under section 401 (a), it obtains its income tax exemption under section 501 (a) of the Code. Employer-based voluntary retirement plans are governed by the Employee Retirement Income Security Act of 1974 (ERISA).

These are standards established to provide protection for employees who invest in plans, including regulations for tax-deferred contributions. Contributions to qualified plans that otherwise qualify as ordinary and necessary business expenses are deductible under Sec. Employers are subject to a tax penalty under Sec. One of the main attractions of qualified retirement plans is fiscal leverage.

. This favorable tax treatment provides powerful tax planning. Such contributions will not be deductible under this chapter; but, if they are otherwise, they will be deductible under this section, subject, however, to. Limitations on deductible amounts (emphasis added).

Finally, what about employees who qualify to defer, choose not to, and otherwise don't receive any allowances under the plan? Are these employees beneficiaries of the plan? While logic may dictate that they are not, they are considered to benefit from the plan for the purposes of the Sec's minimum coverage rules. Again, a definitive guide from the IRS would be useful in understanding this topic. Before the passage of the Economic Growth and Tax Relief Reconciliation Act of 2001, P, L. EGTRRA added Sec.

Previously, taxable compensation could only be considered when determining the deductible limit. In addition, if a company files its tax return before the original due date, but after obtaining an extension of the filing deadline, the due date according to Sec. Amounts paid in a tax year that exceed the deductible amount under Sec. Let us now consider a set of examples: applying the rules discussed above to a hypothetical medical practice.

Each of the examples provides for an allocation of contributions and an accumulation of benefits that is not discriminatory according to Sec. The office employees are O, the owner doctor, E, an employee-doctor, and six staff members (see the employee census in Figure 1). Since the employer's contribution to the profit sharing plan does not exceed 6% of the compensation, Sec. This limitation precludes a deduction in the case of the minimum funding required for a defined benefit plan to the extent that the minimum funding exceeds earned income.

When determining the deductible amount under Sec. Don't get lost in the fog of legislative changes, developing tax problems, and recently emerging tax planning strategies. Membership in the Tax Section will help you stay up to date and make your office more efficient. .