Life and Death Planning for Retirement Benefits

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Chapter 8: Investment Issues; Plan Types 405
The required annual contribution may be determined by an actuarial formula based on the promised
benefits (defined benefit pension plan or defined benefit plan; , or may be simply a
percentage of employees’ compensation each year (money purchase pension plan or money
purchase plan). A pension plan is contrasted with a profit-sharing plan, under which the employer’s
contributions are discretionary or linked to profits. Pension plans have the following features of
interest to estate planners:
 Pension plans are generally not permitted to make “in-service distributions,” i.e.,
distributions prior to age 62 except upon the employee’s termination from employment.
See .
 Pension plans are subject to the strictest federal spousal-rights rules. See
 All pension plans are considered “one plan” for purposes of determining whether there has
been a distribution, within one calendar year of the recipient, of the employee’s entire
balance in “the” plan under lump sum distributions; B)), even if they are
not the same type of pension plan.
8.3.11 Profit-sharing plan
A profit-sharing plan is a QRP . It is a Defined Contribution plan under
which the employer’s contributions are either entirely discretionary or are a fixed percentage of
profits. Most 401(k) plans are profit-sharing plans. Profit-sharing plans qualify for a limited
exemption from federal spousal-rights rules; see
8.3.12 Qualified Retirement Plan
In this book, a Qualified Retirement Plan (QRP) means a retirement plan that meets the
requirements o i.e., it is “qualified” unde (For a different definition sometimes
used in the Code, see ) Types of QRPS include the 401(k) plan, defined benefit plan,
ESOP, Keogh plan, money purchase plan, and profit-sharing plan.
Since has more than 30 separate requirements, some of which cross reference
other lengthy Code sections, it is no mean feat to be qualified under Most of the
requirements are of little concern to the estate planner who is advising the individual participant
or beneficiary. However, it is helpful to be aware of certain concepts that create the
landscape in which all QRPs must function. For example:
 A QRP is established and maintained by the “sponsor” of the plan. Normally, the sponsor
of the plan is the employer of the employees who are covered by the plan, but it could also
be a labor union or an association of employers. The employer could be a sole proprietor
or partnership, in which case the plan is also a Keogh plan .
 The assets of the QRP generally must be kept in a separate trust for the “exclusive benefit”
of the employees and their beneficiaries (the “exclusive benefit rule”)
 limits how much may be contributed to the plan (or accrued on behalf of a
participant) each year. limits the employer’s tax deduction for contributions.