Taxes, Retirement Plans, and SS

  1. Tax-Qualified Plans
    • A retirement plan where contributions by the employer are allowed as a deduction from taxable income, and provides that the deposits for employees' future benefits are not to be considered as taxable income to them in the year in which they are made.
    • Retirement plans that are referred to as tax-qualified are those that receive special tax advantages.Generally speaking, qualified plans are classified as either:

    Defined contribution This type of plan has a separate account for each employee. The plan document states the amount that an employer will contribute to the plan, but does not promise any particular benefits

    Defined benefit The plan document specifies the amount of benefits promised to the employee at his normal retirement date. It does not specify the amount that the employer must contribute annually to the plan to achieve the benefit
  2. Employee Retirement Income Security Act of 1974 (ERISA)
    An act that prescribes federal standards for funding, participation, vesting, termination, disclosure, fiduciary responsibility and tax treatment of private pension plans. ERISA also applies to retirement plans and to "employee welfare benefit plans" (any plan of group medical, surgical, hospital or other health care benefits and group accident, sickness and disability benefit plans).
  3. Individual Retirement Plan (IRA)
    • Type of qualified plan
    • A qualified retirement plan established by ERISA for anyone under age 70 1/2 with earned income, allowing them to set aside up to $2,000 per year on a tax favorable basis for retirement purposes.
    • Any individual who earns wages may participate in an IRA. A person may deduct the maximum contribution if he is a wage earner and does not actively participate in an employer-maintained retirement plan
  4. Roth IRA
    • Type of qualified plan
    • Qualifying taxpayers have the option of establishing Roth IRAs. The primary difference between the two is that contributions to Roth IRAs are not deductible but distributions, if taken correctly, are entirely tax-free

    Contributions are not deductible; however, qualified distributions are received tax-free. To be considered a qualified distribution, the IRA owner must have held the Roth IRA for at least five years and the distribution must be made: on or after the date the owner reaches 59 ½; to the estate or beneficiary upon the owner’s death; as a result of the owner’s disability; for first-time homeowner expenses subjects to $10k lifetime limit
  5. Simplified employee pensions (SEPs)
    • Type of qualified plan
    • A plan where the employer contributes a specific amount into an eligible employee's IRA on behalf of the employee.
    • SEPs are employer-sponsered IRAs
  6. Keogh plans
    • Type of qualified plan
    • A qualified retirement plan for the self-employed.
    • Also known as a HR-10 plan
  7. Tax-sheltered annuities (TSA) or 403(b) plans
    • Type of qualified plan
    • A section of the Internal Revenue Code authorizing tax sheltered annuities as qualified pension plans for employees of nonprofit organizations.
    • Government employees are not eligible
    • Those eligible for TSAs include public, private and parochial school teachers, school superintendents, college professors, clergymen and social workers
  8. 401(k) plan
    • Type of qualified plan
    • A qualified elective deferral plan where employee contributions are made by means of a salary reduction agreement, with or without matching employer contributions.
    • Allows employees to elect to contribute a portion of their income into an account in their name and instruct their employer to make contributions on their behalf
  9. SIMPLE (Savings Incentive Match Plans)
    • Type of qualified plan
    • A tax-favored means for providing a retirement option that does not have to satisfy many of the of the qualified plan requirements
  10. Nonqualified Plans
    • A contribution consisting of a distribution from a qualified plan that is deposited (rolled) in another qualified plan to postpone current taxation of the distribution.
    • These plans are used to provide additional benefits
  11. Key Employee Insurance
    • (1) Insurance on the life or health of a key employee, the loss of whose services would cause an employer financial loss. The policy is owned by and payable to the employer. (2) In health insurance the term is also used to designate salary continuation insurance or a medical benefit plan payable to the key employee, with the employer paying all or part of the premium.
    • Employer is the beneficiary
    • Premium is not tax deductable
  12. Buy-Sell Agreement
    (1) An agreement among part-owners of a business that says that under stated conditions (i.e., disability or death), the person withdrawing from the business or the person's heirs are legally obligated to sell their interest to the remaining part-owners, and the remaining part-owners are legally obligated to buy at a price fixed in the agreement; (2) a similar agreement between an owner or part-owner of a business and a nonowner, such as a key employee.
  13. Defined Benefit Plan
    A qualified retirement plan where the employer makes contributions on behalf of all eligible employees in order to provide a specific retirement benefit. The amount of the contribution is not specifically defined, but the amount of the retirement benefit is defined.
  14. Group Life Insurance
    • Life insurance provided for members of a group. It is most often issued to a group of employees but may be issued to any group provided it is not formed for the purpose of buying insurance. The cost is lower than for individual policies because administrative expenses per life are decreased, there are certain tax advantages and measures taken against adverse selection are effective.
    • Owned by employer
    • Employee get certificate of insurance
    • People can't just form a group
    • Two types of group payment: Noncontributory and contributory premium
    • Noncontributory premium: employees pay 100% of premium; employer get tax deduction that is benefit of the employee; 100% of employees must enroll
    • Contributory premium: Portion are paid by ER/EE (ie. 80/20); 75% of employee must enroll; usually annual renewable term insurance (WL=expensive)
    • Grace period of group life is 31 days; employee must chose (regardless of health) to convert to individual WL policy based on current age
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Taxes, Retirement Plans, and SS