9.3 Favorable Tax Treatments
- Employer contributions are considered an ordinary and necessary business expense and are considered tax deductible, lowering the business' income taxes.
- The earnings of investments in a qualified plan are exempt from income taxation.
- Employer contributions are not taxable to employees as income in the years contributed, but rather at such time as they are received in the form of benefits (usually at retirement).
In order for retirement plans to be approved by the IRS for favorable tax treatment, they must fulfill the basic requirement categories of participation, coverage, vesting, funding, and contributions.
Participation Standards
In order to establish employee eligibility, qualified employer plans must meet minimum participation standards. The employee must be at least 21 years old and have completed one full year of service; or if the plan provides 100% vesting upon participation, the employee is required to complete two years of service before enrolling.
Coverage Requirements
Coverage requirements are designed to prevent any type of employee discrimination. Favoritism of company officers, highly compensated employees, and/or shareholders is strictly forbidden.
Vesting Schedules
Vesting is the granting of pension rights to an employee, usually after a fixed period of employment, with the pension given either when the job is terminated or at retirement. An employer retirement plan must provide for a vesting schedule which sets forth the time period by which an employee-participant becomes entitled to nonforfeitable benefits under the plan. (Vesting schedules for Florida are addressed in detail in Lesson 19.)
Funding Standards
In order for a plan to be qualified, it must be funded. An employer must deposit enough money to cover the pension plans and administrative costs (the third party who handles the investments).
