Considering all of the money involved, it’s important for corporations to spend significant time deciding which types of retirement plans will best suit their needs. There are basically four kinds: Qualified and unqualified plans, defined-benefit plans, and defined-contribution plans. Smaller corporations often choose qualified plans because they’ve earned the approval of ERISA (the federal Employee Retirement Security Act), the IRS, and the Department of Labor (DOL).
Qualified plans are also popular because they frequently offer certain tax breaks and other features referenced below.
Common Tax Benefits of Qualified Retirement Plans
They provide the opportunity for immediate deductions. Corporations like being able to take deductions for their contributions to these plans on their annual corporate income tax returns;
Deferred taxation for employees. Employees are not immediately taxed on the income they receive from their employers’ contributions to these plans. This added income can include interest income, dividends, and appreciation of assets. Taxation will begin when the employees retire and begin receiving retirement benefits from their plans. (Fortunately, many seniors will fall into lower income tax brackets by that time);
Probate avoided. These types of retirement benefits do not have to pass to others through probate. The money is simply distributed to those designated as the plan’s beneficiaries.
Other Positive Attributes of Qualified Retirement Benefit Plans
Corporations can choose their own plan sponsors. It’s always wise to speak with other companies operating near yours to find out who they’ve chosen to fill this role and how the employees like the program. You can invite several plan sponsors to come in and speak to your corporate executives and employees before choosing one;
They must treat all employees who join on an equal basis. In other words, corporate officers cannot receive a “better deal” under such plans than lower-level employees. Failing to uphold this anti-discrimination feature can cause you to forfeit a more favorable tax status;
They are not supposed to be set up or used as “tax shelters.” That’s why these plans have what are often referred to as “top heavy” rules. In other words, those who run the corporation are not supposed to choose a qualified plan simply because it allows them to create tax shelters. A qualified plan is considered to be ‘top heavy’ if the accumulated benefits for a small number of executive level employees exceeds 60% of the value that all other plan participants receive.
To obtain help with handling all of your Georgia business planning needs, please contact Shane Smith Law today. You can schedule your free initial consultation with a knowledgeable Peachtree City estate planning attorney by calling: (770) 487-8999.