Ch24IM - 441 Chapter 24 Deferred Compensation and Education...

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© 2009 CCH. All Rights Reserved. Chapter 24 441 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. Quali f ed employer-sponsored plans must meet certain requirements in order to receive favorable tax treatment under the Internal Revenue Code. Nonquali f ed employer-sponsored plans are less restrictive and easier to set up than quali f ed 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: “Quali f ed” and “Nonquali f ed” ¶24,001 Quali f ed Employer-Sponsored Plans Quali f ed deferred compensation plans (QPs) are employer-sponsored plans that must satisfy nondiscrimination requirements, distribution requirements, limits on eligible compensation, annual contributions and annual bene f ts, trustee requirements, participation and coverage requirements, vesting requirements, and operating requirements. In return for satisfying these requirements, there are many tax and nontax advantages: Contributions may be tax deferred. 1. Deductions are immediately available to employers. 2. Income may be tax deferred. 3. Future payouts may be subject to lower tax rates. 4. Payroll tax exemptions may apply. 5. Portability options may be available. 6. A credit to employers for startup costs may be available. 7. A credit to employees for contributions to a QP may be available. 8. Plan assets may be protected from the employer, employer creditors, and employee creditors. 9. QPs can be used to attract and retain employees. 10. Participants may be permitted to borrow up to $50,000 from their QPs. 11. ¶24,015 Nonquali f ed Employer-Sponsored Plans Nonquali f ed 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: More F exibility in choosing who participates. 1. Unlimited amount of bene f ts. 2.
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442 CCH Federal Taxation—Comprehensive Topics Chapter 24 © 2009 CCH. All Rights Reserved. Unfavorable features include: Limited deferral of NP bene f ts. 1. No immediate tax deduction to employers. 2. Payroll tax on employer contributions. 3. Basic Types of Employer-Sponsored Quali f ed Retirement Plans ¶24,101 De f ned Contributions Plans One of the two basic types of employer-sponsored quali f ed retirement plans is a de f ned contribution plan.
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Ch24IM - 441 Chapter 24 Deferred Compensation and Education...

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