What Is A Qualified Pension Plan?

This is in response to an email question: My husband has a “qualified pension plan” what is this? Does it operate like a 401k?

Qualified Pension Plan

Qualified Pension Plans Are Rare

What is a qualified pension program?

So the type of plan that is in question, a qualified pension program, is a blast from the past. This type of plan began to lose favor with the implementation of the 401k.
A qualified plan or defined benefit plan has 4 key characteristics:

1. The plan is committed to writing. A copy has been communicated and documented that it has been received by the participants.

2. The plan clearly spells out the requirements for eligibility, for separation of service whether from a combination of age or disability and or years of service.

3. The plan states how payments will be made after retirement, at regularly recurring intervals, once the employee has separated from service. This will continue from the time of retirement at least until the death of the participant and possibly longer. While not required, offering the option for a lump sum distribution,  payment or payments doesn’t disqualify the plan as long as the other provisions are available.

4. There are no options for the distribution of any program benefits to any employee until after the termination of employment. There are allowable exceptions for incidental disability benefits or the return of the employee’s previously taxed contributions and income or gains if the employee is required to contribute to the pension plan.

If the pension program is a SEP, a Keogh, a federally qualified tax sheltered annuity program or a tax deferred custodial account, an additional provision must be included in the written provisions to be a qualified pension program.
·Program benefits cannot be paid before retirement, death, disability, separation from service unforeseeable emergency or attaining the age of 59 ½ without a substantial penalty for early withdrawal.

Pension plans place the responsibility for retirement on the shoulders of the employer. Hence the name defined benefit plan. 401k plans shift the responsibility to the employee, hence the name defined contribution plan. This is why employers moved to defined contribution rather than defined benefit plans.

No information contained in this post should take the place of professional information from your legal or tax advisor. This post is informational in nature and your personal situation may not apply. You should always seek the advice of your own tax or legal advisor before implementing any ideas contained in this or other blogs or websites.

Legal