Qualified and Nonqualified Retirement Plans
People use many means to plan for retirement. Recognizing the necessity for working people to provide for their retirements, the government offers some significant tax benefits for certain kinds of retirement plans. These are called qualified retirement plans, and this chapter focuses on the plans that apply to businesses and their employees.

In order to be qualified, a retirement plan must meet certain requirements of the Internal Revenue Code with respect to participation, funding, benefits, vesting, and so forth. When qualified, a retirement plan offers significant tax advantages. If a plan qualifies, contributions made on behalf of participants to fund their retirement benefits are

• Tax-deductible to the business
  
  
• Generally not currently taxable to the employee
  
  
• Allowed to accumulate in the plan on a tax-deferred basis
  
  
• Taxed at the time of distribution to retirees under special, advantageous rules

Within the qualified category are two kinds of overall plans:

• A defined benefit plan offers benefits that are determined using a definite formula. Contributions to defined benefit plans must be made in amounts that fund the benefits promised to plan participants.
  
  
• A defined contribution plan focuses attention on the contributions made to the plan as opposed to the benefits the plan will pay out. At retirement, the amount in the plan participant’s account is totaled and a distribution is made.

Defined Benefits Plans
Defined benefit plans are designed to provide a specific benefit to an employee upon retirement. The amount of the benefit is usually dependent on length of service or highest salary earned or a combination of these. Deferred annuities are commonly used to fund defined benefit plans. These may be issued on a group or individual basis. More