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Simple English definitions for legal terms
qualified pension plan
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A quick definition of qualified pension plan:
A qualified pension plan is a retirement plan set up by an employer or employee organization that meets certain federal requirements. These plans allow employees to receive tax benefits for contributions and tax-deferred investment growth. It provides retirement income to employees or results in a deferral of income by employees extending to the termination of employment or beyond. There are different types of pension plans, including contributory, defined-contribution, defined pension, noncontributory, nonqualified, and top-hat pension plans.
A more thorough explanation:
A qualified pension plan is a retirement plan established by an employer or an employee organization that complies with federal law (ERISA). This type of plan allows employees to receive tax benefits for contributions and tax-deferred investment growth.
Examples of qualified pension plans include:
- Defined-contribution pension plan: A plan in which both the employer and the employee contribute.
- Defined pension plan: A plan in which the employer promises specific benefits to each employee.
- Noncontributory pension plan: A plan contributed to only by the employer.
For instance, a defined-contribution pension plan may require an employer to match an employee's contribution up to a certain percentage of their salary. This plan allows employees to save for retirement while receiving tax benefits and employer contributions.
On the other hand, a defined pension plan promises a specific benefit to each employee upon retirement. This plan is beneficial for employees who want a guaranteed retirement income.
Overall, a qualified pension plan is an important tool for employees to save for retirement while receiving tax benefits and employer contributions.