How to Establish a Qualified Plan

A qualified plan is a form of retirement plan that meets the IRS's requirements for unique tax incentives. A qualified plan is set up by an employer for the benefit of employees. A qualified plan is not an IRA, SEP or SIMPLE IRA; these are all forms of independent accounts that may receive employer assistance but are not managed by the employer. A qualified plan involves much more management and attention from an employer both in the establishment and maintenance process.

Choose a Type of Qualified Plan

There are two primary types of qualified plans: defined-benefit plans and defined-contribution plans. With a benefit plan, the employer promises a certain amount of benefit upon an employee's retirement based on that employee's length of service to the company and salary while employed. This is a simple formula used for each employee. With a contribution plan, the employee and employer both contribute money into an account that is managed for many years. The amount of money contributed determines the ultimate benefit, and no specific benefit is promised. An employer does not have to contribute funds, but typically an employer offers a "match" program which offers tax benefits to the employer as well as the employee.

Elect a Plan Provider

Once you know the form of plan you would like to set up, you should begin shopping around for a plan provider. As a business owner, you will be responsible for managing the 401k monies of all your employees. You and your board, where applicable, will choose the plan provider and investment strategy for your employees. This is quite a task, and it should not be taken lightly. Choose a plan provider that you are comfortable working with for years to come. Know that you will be heavily involved in managing the plan, and this provider will be your key contact.

Provide a Summary Plan Description

Once you have decided on your plan provider and your plan, it is time to create an adoption agreement and plan document. The plan document includes all information on how the plan will operate, and you will use this to pass a resolution actually adopting the plan for your company. Then, you must notify your employees. This is where the Summary Plan Description (SPD) comes into play. The SPD will include all information your employees need to know to understand their benefits. Thankfully, most plan providers have form documents you can use in order to inform your employees.

Establishing the Plan and Qualifying Employees

Your plan must be established by the last day of your company's tax year. You will be the one who determines how an employee qualifies for the plan. For example, you may place age restrictions, job restrictions or length of service restrictions. Some qualified plans are only offered to senior executives; others are offered to all employees who have worked with the company for more than one year. This is entirely up to you, but you are responsible for informing employees of the information and assuring it is followed to your liking.

Non-Qualified Plan

A non-qualified plan is a type of retirement plan that does not come with any tax benefits for contributors. Some employers offer non-qualified plans, but the majority of retirement plans today are qualified. Here are a few things to consider about non-qualified retirement plans and how they differ from qualified plans.

Tax Benefits

One of the biggest differences between non-qualified plans and qualified plans is the tax treatment. With a qualified plan, you can contribute money on a pretax basis. This allows you to put back more money toward your retirement. With a non-qualified plan, you cannot do this. You have to fund the account with after-tax money.


Another difference between non-qualified and qualified plans is disclosure. Qualified plans have to disclose all the information about them to plan participants. If anyone in the plan wants to know any information about the plan itself, he or she has to be granted access to this information. Qualified plans also have to provide documents to the IRS on an annual basis.


Qualified plans have to be fair for all participants. This means that they cannot give more money to highly paid employees or a particular group of employees in the company. They have to distribute assets equally.

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