Presented by Paystrubmakr.com By John Wolf and Tom Cullen CPA
PAYSTUB MAKER is providing information about retirement and payroll.
Qualified Deferred Compensation
Qualified deferred compensation plans are the most important form of compensation to provide retirement and separation from service benefits. Qualified v. Non-qualified Plans A qualified deferred compensation plan is a plan that meets specified requirements to obtain special tax treatment. In general, qualified deferred compensation plans must satisfy the following criteria:
Six jurisdictions (California, Hawaii, New Jersey, New York, Puerto Rico and Rhode Island) operate state disability insurance (SDI) programs. Another nine jurisdictions (California, Connecticut, District of Columbia, Massachusetts, New Jersey, New York, Oregon, Rhode Island and Washington) are now operating, or will soon be operating, paid family and medical leave (PFML) insurance programs.
Depending on the jurisdiction, the employee may pay all contributions to the SDI and/or PFML program through wage withholding, or the employer and the employee may share the cost of the insurance coverage. Most states allow employers to use a private insurance company or self-insured plan in lieu of paying into the state insurance fund(s).
The following chart shows the state SDI and PFML rates and taxable wage limits for 2021 based on information currently
For many years, on every payroll day on every pay stub, money was put aside for the day of retirement.
For many employees, the retirement plan will be the primary vehicle in their employer-provided benefit program. These plans are expressly approved by the Government and are significant wealth-building devices. Historically, the employer considered pension plan benefits a “gift” to the employee. Unfortunately, the current thinking of many employees is that such benefits are a“right.”
No paystub only a retiree paycheck
Qualified deferred compensation allows the employer to have a tax deduction every time the employer puts money aside for the employee’s retirement. “Funding” the retirement plan through the use of a trust or similar arrangement does this.
Timing of Deductions
A contribution to a qualified plan is generally deductible in the employer’s taxable year when paid. However, §404(a)(6) 1 provides that an employer is deemed to have made a contribution to the plan as of its year-end if the contribution is made on account of such year and is made by the due date of its tax return including extensions. A special rule is provided for CODAs.
Part of Total Compensation
Corporate contributions to a qualified plan are currently deductible as an ordinary and necessary business expense. However, keep in mind that benefits will be combined with salary to arrive at total compensation that must be “reasonable.” In the case of shareholder-employees, who are common in closely held corporations, this could result in IRS questions when substantial benefits are being provided. It should be pointed out that the reasonableness test must be met even when plan contributions fall within the maximum limits as set forth in the Code.
As a general rule, qualified plan benefits or contributions may not be based on imputed salary or non-qualified deferred compensation arrangements. Therefore, an employee who draws no current salary may not be included in as a participant in a qualified plan. Similarly, shareholder-employees who elect to reduce their current salaries under non-qualified deferred compensation contracts may suffer the disadvantages of reduced contribution limits for qualified plan purposes.
For the coming weeks, paystub maker will provide information about retirement funding with relation to payroll
Disclaimer: John Wolf and paystubmakr.com are making a total effort to offer accurate, competent, ethical HR management, employer, and workplace advice. We do not use the words of an attorney, and the content on the site is not given as legal advice. The website has readers from all US states, which all have different laws on these topics. The reader should look for legal advice before taking any action. The information presented on this website is offered as a general guide only.