Basics of Total Rewards

Qualified Retirement Plans

Qualified retirement plans are employer-provided plans designed to allow employees to save money for their retirement. Under the U.S. IRS Tax Code, these plans have tax advantages, which allow employees to contribute before-tax dollars to their plans. Taxes are only paid on contributions when the individual withdraws funds at retirement. Employer contributions are tax deductible. Employer contributions are tax deductible. Qualified plans are secured, but are subject to restrictive rules and extensive regulations.

Most organizations have qualified retirement plans allowing both full-time and part-time employees to participate.

There are two types of basic retirement plans:

• Defined Benefit Plans. An employer contractually agrees to pay a specified amount to an employee upon retirement. The formula for determining the amount is stated in the plan document and takes into consideration the following: years of employment with the employer, age, and salary. The employee does not contribute to these plans. It is 100% employer sponsored.
  
  Example: Pension plans are defined benefit plans.
• Defined Contribution Plans. An employer deposits a specific amount into an individual account for each employee. The contributions made to the individual participant's retirement account are specified under the terms of the plan. These kinds of plans are also known as individual retirement plans. Unlike a defined benefit plan, there is no guaranteed amount paid at retirement. The amount paid depends on contributions and the investment results of the account. The employee also contributes before–tax dollars to the account.
  
  Example: A 401(k) plan is a type of defined contribution plan.

In organizations today:

• Pension plans are much less likely.
• The use of 401(k) plans is widespread. 401(k) plans allow "funding as you go"; funds are set aside and can be reviewed by participants.
• Due to the complexity and liabilities of retirement plan administration, many organizations use outside vendors to provide total administration services. Organizations that wish to "do it themselves" have to get involved in investment management, trust services, life insurance, bonding, errors and omission insurance, communications, administration, etc.