Qualified vs Non Qualified Plans
The most valuable asset to any company is its employees. After all, no company can run effectively without an excellent team to ensure that everything is functioning smoothly.
Your employees do a lot for your company, so you should be sure you are providing them with the proper support as 
well. Understanding a defined benefit plan pros and cons are extremely valuable benefits that let your employees know that you care about them and their future.
The downside to companies offering these plans is that they are incredibly complex. Before considering what type of retirement plan you should offer as an employer, you should know the defined benefit plan pros and cons.
The Basics of Retirement: Qualified vs Non Qualified Plans
The first step to understanding the pros and cons of companies offering retirement plans is to understand the basics of retirement plans.
All plans are either “non-qualified” or “qualified” plans.” Non-qualified plans do not meet Employee Retirement Income Security Act of 1974 (ERISA) or the Internal Revenue Code requirements. You may be thinking: What is the point of companies offering a nonqualified plan? Typically, these plans are designed to provide delayed payment to one or more executives.
Qualified plans are the plans that most small businesses choose to offer their employees, because of they qualify for tax advantages. These types of plans meet the Internal Revenue Code and ERISA requirements. Within qualified plans, employees do not have to pay income tax on the amounts contributed and an employer gets a tax deduction for any contributions made to the plan.
Is a pension Qualified or Non Qualified?
Non Qualified Plans in More Detail
One thing that most employers get wrong about non-qualified plans is thinking that they are not subject to any of the guidelines that qualified plans are subject to. In fact, nonqualified plans are subject to quite a few of those guidelines.
Non-qualified simply means that these plans do not have to follow certain pension guidelines – such as vesting, funding, and eligibility provisions. Because of this, nonqualified plans do not receive the tax advantages that qualified plans receive.
The thing to be aware of with nonqualified pension plans is that they are complex. If you do not meet the distribution or funding restrictions of these plans, you may be subject to tax penalties. As with any financial or business decision, you should discuss the details of these plans with a financial adviser before determining whether or not they are right for your company.
Additionally, within a nonqualified plan, your business income tax deduction will be deferred. This means that – until the funds are made available to your employees – you will not be eligible for a tax deduction. Realistically, it could be years before you receive a deduction.
Details on Qualified Plans
Qualified plans are categorized as either traditional pension plans (defined benefit plans) or a defined contribution plan (401(k) or profit-sharing). The former is funded by the contributions of the employer or business owner and provides specific benefits. The latter is funded by both employee and employer contributions, and the benefits are largely determined by how well investments perform.
Qualified plans are generally less complex than nonqualified plans, but typically include the following components:
- The dividends, interest and investment earnings on the contributions of a qualified plan are tax-deferred. Employees will not have to pay taxes until they withdraw their funds.
- An employer has the option of allowing employees to make post-tax Roth contributions to their 401(k) plan. With this option, there is no face-value tax benefit; however, these contribution distributions are not subject to federal income tax.
- With a qualified plan, any employer contributions are can be made on a pretax basis. This means that employees don’t have to pay income taxes on anything contributed by the employer until they withdraw their funds.
In a lot of instances, these plans come with one other benefit: if you have outstanding debts, creditors cannot touch your plans funds to pay it off.
Pros and Cons of Companies Offering Retirement Benefits
Let us start off by saying that we are biased. Here at the Storick Group, we believe offering retirement benefits is always a pro. The addition of these benefits can help companies attract and retain better talent and can improve workplace morale.
For small business owners, the addition of a retirement plan is beneficial because they, too, can take advantage of the plan.
Additional pros of offering pension plans to your employees include:
- Recruiting advantages
Pension plans can be used to supplement your compensation package (this is particularly beneficial to start-ups) - The plan can be used to save for employer retirement, as well as employee retirement
- Significant tax advantages.
- Increase in office productivity for profit-based pension plans
The cons to offering a defined benefit pension plans are that they are often a hassle to set up and, occasionally, administrative costs can be complicated and expensive. For most employers, the number one downside to setting up a pension package is the cost, particularly for smaller companies.
We believe administrative costs and complex pension rules should not deter you from offering your employees a retirement plan. Give us a call today and let our financial experts walk you through your options. No matter your company size or budget, there is a retirement option for your company.
