Retirement Plans

A number of federal laws govern employment-based retirement plans, including the Employee Retirement Income Security Act (ERISA), the Pension Protection Act of 2006 (PPA), and the Economic Growth and Tax Relief Reconciliation Act of 2001.

Qualified Retirement Plans

Qualified retirement plans are those that meet the statutory and regulatory requirements to receive tax-favored treatment by the IRS. All qualified retirement plans are covered by ERISA. There are two general categories of qualified retirement plansdefined-benefit plans (such as traditional pensions) and defined-contribution plans (such as 401(k)s).

Defined-Benefit Plans

In defined-benefit plans, predetermined formulas are used to calculate the level of benefits that will be payable beginning at retirement, usually on a monthly basis.

Defined-Contribution Plans

In defined-contribution plans, the level of future benefits depends on how much money the employee and employer contribute to the plan and the interest earned over time. Defined-contribution plans include 401(k)s, profit sharing plans, simplified employee pension plans (SEPs), savings incentive match plans for employees of small employers (SIMPLE), and employee stock ownership plans (ESOPs).

Nonqualified Retirement Plans

These plans are typically provided as extra compensation to key executives and are exempt from many of ERISA’s requirements. Although they do not carry the same tax benefits as qualified plans, they are subject to their own sets of rules, including the requirements of the Internal Revenue Code Section 409A.

Retirement Plan Requirements

Federal law sets many requirements for retirement plans including minimum funding, contribution limits, and nondiscrimination provisions.