Which of the following situations might convince an employer to choose a nonqual
ID: 2756232 • Letter: W
Question
Which of the following situations might convince an employer to choose a nonqualified retirement plan over a qualified profit-sharing plan? The employer, a closely held C Corporation, is in the 15% income tax bracket and the sole owner of the employer is in the 35% income tax bracket. The employer only wants to meet the organization's objectives of attracting executives, retaining executives, and providing for a graceful transition in company leadership. The employer is not concerned with providing retirement benefits to the rank and file employees. The employer is not willing to pay high administrative costs. All of the above.Explanation / Answer
DEFINITION of 'Qualified Retirement Plan'
A type of retirement plan established by an employer for the benefit of the company’s employees. Qualified retirement plans give employers a tax break for the contributions they make for their employees. Qualified plans that allow employees to defer a portion of their salaries into the plan also reduce employees’ present income-tax liability by reducing taxable income. Qualified retirement plans help employers attract and retain good employees.
DEFINITION of 'Non-Qualified Plan'
Any type of tax-deferred, employer-sponsored retirement plan that falls outside of employee retirement income security act (ERISA) guidelines. Non-qualified plans are designed to meet specialized retirement needs for key executives and other select employees. These plans also are exempt from the discriminatory and top-heavy testing that qualified plans are subject to.
Tax treatment is the main difference between qualified and non-qualified retirement plans. Contributions to a non-qualified plan are not deductible to the employer until the employee takes a withdrawal and is taxed on the income. Employer contributions to a qualified plan may be deducted immediately.
Thus option A is the right choice. Because employer want to save on high tax cost. If employer opts for qualified plan he will have to pay tax immdiately which is not the case with non qualified plan.
Also B is false as non qualified plans are generally provided for top executives to retain them till retirement.
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