Page 185 - Group Insurance and Retirement Benefit IC 83 E- Book
P. 185
Requirement of Permanence
To guard against tax abuse in the United States, the Internal Revenue Service (IRS) has
promulgated rules that require that pension plans be permanent as opposed to a temporary
arrangement used to capture tax benefits. Regulation 1.401-1(b)(2) states that "[t]hus,
although the employer may reserve the right to change or terminate the plan, and to
discontinue contributions there under, the abandonment of the plan for any reason other
than business necessity within a few years after it has taken effect will be evidence that
the plan from its inception was not a bona fide program for the exclusive benefit of
employees in general. Especially will this be true if, for example, a pension plan is
abandoned soon after pensions have been fully funded for persons in favor of whom
discrimination is prohibited..." The IRS would have grounds to disqualify the plan
retroactively, even if the plan sponsor initially got a favorable determination letter.
Qualified retirement plans
Qualified plans receive favorable tax treatment and are regulated by ERISA. The
technical definition of qualified does not agree with the commonly used distinction. For
example,403(b) plans are not considered qualified plans, but are treated and taxed almost
identically.
The term qualified has special meaning regarding defined benefit plans. The IRS defines
strict requirements a plan must meet in order to receive favorable tax treatment,
including:
A plan must offer life annuities in the form of a Single Life Annuity (SLA) and a
Qualified Joint & Survivor Annuity (QJSA).
A plan must maintain sufficient funding levels.
A plan must be administered according to the plan document.
Benefits are required to commence at retirement age (usually age 65 if no longer
working, or age 70 1/2 if still employed).
Once earned, benefits may not be forfeited.
A plan may not discriminate in favor of highly compensated employees.
A plan must be insured by the PBGC.
