Business Definition for: qualified plan or trust
qualified plan or trust
tax-deferred
plan set up by an employer for employees under 1954 Internal Revenue Service rules. Such plans usually provide for employer contributions-for example, a profit-sharing or pension plan-and may also allow employee contributions. They build up savings, which are paid out at retirement or on termination of employment. The employees pay taxes only when they draw the money out. When employers make payments to such plans, they receive certain deductions and other tax benefits.
See also
401(K) Plan
,
salary reduction plan
Related Terms:
employee investment plan; also called salary reduction plan. It allows employees to defer part of their gross salary and to invest the amount in stocks, bonds, or money market funds. The amount is indexed for inflation, using the Consumer Price Index (CPI). Employee contributions and all earnings arising from them go tax-free until withdrawn at the request of the employee or until the employee retires or leaves the company. Usually the employer provides a choice of investment vehicles into which the funds may be placed while earning tax-deferred returns. Furthermore, many employers offer matching contributions. The limitation of annual deferrals to 401(k) plans applies only to an employee's elective deferrals-not the employer's matching funds. These contributions, plus the current reduction in income taxes, make 401(k) salary reduction plans an excellent longterm investment.
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