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Qualified & Nonqualified Retirement Plans

One of the most effective benefits for attracting and retaining employees is a company-sponsored retirement plan. Most employer-sponsored pension and profit sharing plans are qualified retirement plans. That is, each employee's share of the plan's assets and its earnings are held until the employee leaves the company or retires. No taxes are due until the employee receives the money, and the employers are not taxed on contributions.

Pension plans usually define eventual benefits based on wages and length of service. Profit sharing plans typically define the employer's annual contribution. Benefits are determined by the size of the contributions and their earnings.

Two types of qualified retirement plans are SIMPLEs and 401(k) plans. To compare these popular plans, see below:

SIMPLE vs. Traditional 401(k)
Which is best for your business?

 

SIMPLE IRA

SIMPLE 401(k)

Standard 401(k)

Maximum Business Size

100 or fewer employees

100 or fewer employees

No limit

Individual Contribution Limit

$13,000 in 2019 ($16,000 for those over age 50)

$13,000 in 2019 ($16,000 for those over age 50)

$19,000 in 2019 ($25,000 for those over age 50)

Discrimination Testing

No

Limited

Yes

Mandatory Employer Match

Yes, 1%-3% of salary

Yes, 3% of salary

No

Vesting

Immediate

Immediate

Up to 7 years

Administration

Least

Medium

Most

 

For a full chart of contribution and benefit limits for qualified retirement plans, see below:

 

Indexed Contribution & Benefit Limits
for Qualified Retirement Plans: 2019

 

Type of Plan

Amount

Individual Retirement Accounts contribution limit - All IRAs* $6,000
Section 401(k) plan or SAR-SEP* $19,000
Section 403(b) plan $19,000
Section 408(p)(2)(A) SIMPLE contribution* $13,000
Section 457(b)(2) limit $19,000
Section 415 limit for:
Defined contribution plans $56,000
Defined benefit plans $225,000
Highly compensated employees Section 414(q) $125,000
FICA taxable wage base Social security (tax rate 6.20% for employees; 12.40% for self-employed) $132,900
Medicare (tax rate 1.45% for employees; 2.90% for self-employed) No limit

Age 50 additional contributions

Type of Plan Amount
401(k) type plans $6,000
SIMPLE plans $3,000
IRAs $1,000

Because qualified retirement plans can restrict the amount of benefits a higher-paid employee can receive, nonqualified plans can be attractive. Nonqualified plans don't have to cover every employee. There are no limits on compensation, benefits, or contributions other than an overall reasonableness test. Plus, there are minimal bookkeeping and reporting requirements.

However, nonqualified plans do have their disadvantages:

  • The benefits are unsecured—they are merely "promises to pay." A company cannot formally set aside funds as future benefits. Any assets that may be intended for these benefits must remain general assets of the company, and therefore, may be subject to the claims of creditors.

  • Payroll taxes are generally due when services are performed, not when compensation is paid.

  • The employer doesn't receive a tax deduction until the benefits are actually paid to the covered employees or are included in their income.