Chapter 24 - 403 Chapter 24 Deferred Compensation and...

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403 Chapter 24 Deferred Compensation and Education Savings Plans SUMMARY OF CHAPTER Deferred compensation and education savings plans are designed to accumulate income that is either tax deferred or tax exempt in order to save for retirement or education. Employer-sponsored plans allow participants to defer the receipt of taxable compensation until some future year. Qualified employer-sponsored plans must meet certain requirements in order to receive favorable tax treatment under the Internal Revenue Code. Nonqualified employer-sponsored plans are less restrictive and easier to set up than qualified plans but may offer fewer tax- favored advantages to employers. Working individuals who desire to provide for additional retirement income may choose a traditional or Roth Individual Retirement Accounts (IRA). Working and nonworking individuals who wish to save for education may choose a Coverdell Education Savings plan or a 529 plan. Employer-Sponsored Deferred Compensation Plans: “Qualified” and “Nonqualified” ¶24,001 Qualified Employer-Sponsored Plans Qualified deferred compensation plans (QPs) are employer-sponsored plans that must satisfy nondiscrimina- tion requirements, distribution requirements, limits on eligible compensation, annual contributions and annual benefits, trustee requirements, participation and coverage requirements, vesting requirements, and operating requirements. In return for satisfying these requirements, there are many tax and nontax advantages: 1. Contributions may be tax deferred. 2. Deductions are immediately available to employers. 3. Income may be tax deferred. 4. Future payouts may be subject to lower tax rates. 5. Payroll tax exemptions may apply. 6. Portability options may be available. 7. A credit to employers for startup costs may be available. 8. A credit to employees for contributions to a QP may be available. 9. Plan assets may be protected from the employer, employer creditors, and employee creditors. 10. QPs can be used to attract and retain employees. 11. Participants may be permitted to borrow up to $50,000 from their QPs. ¶24,015 Nonqualified Employer-Sponsored Plans Nonqualified Employer-Sponsored Plans (NPs) share the same fundamental goal as QPs: the deferral of tax. However, certain features of NPs are generally regarded as favorable or unfavorable as they relate to QPs. Favorable features include: 1. More flexibility in choosing who participates. 2. Unlimited amount of benefits. Unfavorable features include: 1. Limited deferral of NP benefits. 2. No immediate tax deduction to employers. 3. Payroll tax on employer contributions. Chapter 24
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404 CCH Federal Taxation Comprehensive Topics Basic Types of Employer-Sponsored Qualified Retirement Plans ¶24,101 Defined Contributions Plans One of the two basic types of employer-sponsored qualified retirement plans is a defined contribution plan.
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This note was uploaded on 10/23/2009 for the course ACCTG 16 taught by Professor Juliekim during the Summer '09 term at Santa Monica.

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Chapter 24 - 403 Chapter 24 Deferred Compensation and...

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