In order to be considered a “qualified plan” for tax purposes, the plan must meet certain Internal Revenue Service (IRS) requirements. Three different types of plans that generally meet this conditions are qualified employee plans, qualified employee annuities, and tax-sheltered annuity plans. Whether a plan is qualified or unqualified will determine which method is used to determine the tax-free and taxable parts of the payments you receive from the plan.
Qualified Employee Plan
This is a stock bonus, pension, or profit-sharing plan set up by an employer in accordance with IRS requirements in order to receive special tax benefits. Contributions made to the plan are generally tax-deductible expenses for the employer and are tax-deferred for the employees. The proceeds, or benefit payments from these plans can also qualify for capital gain treatment or a special 10-year tax option on lump sum distributions, if the participant qualifies.
Qualified Annuity Plan
This is a retirement annuity that an employer purchases for an employee, that meets certain IRS requirements.
Tax-Sheltered Annuity Plan
This is a type of retirement plan that is usually provided to employees of public schools and certain tax-exempt organizations. Benefits are generally provided by purchasing annuities for the employees. These plans are also known as 403(b) plans, or tax-deferred annuity plans.
Section 457 Plans
These are deferred compensation plans for employees of a state or local government or a tax-exempt organization. Tax is not paid on employee compensation that is deferred under the plan or on earnings from the plan investments. Tax is paid when withdrawals or distributions are made from the plan.
Qualified Plans for Self-Employed Persons
These plans are often referred to as H.R. 10 or Keogh plans. They can be set up by sole proprietorships, partnerships, and corporations. They can cover the self-employed individual as well as employees.