FEDERAL ESTATE TAX TREATMENT OF QUALIFIED PLAN BENEFITS

The federal estate tax is a tax separate from the income tax that is imposed on the value of a decedent's property at the time of death. The estate tax is payable out of the decedent's estate and, therefore, reduces the amount available to the beneficiaries. Only a small percentage of decedents—less than 5 percent—have enough wealth to be concerned about the estate tax because of a high initial minimum tax credit applicable to the estate tax. No estate tax return need be filed for a decedent whose gross estate is less than $675,000 (in 2000). This amount is scheduled to rise incrementally to $1,000,000 in 2006. Also, there is an unlimited marital deduction for federal estate tax purposes—that is, there is no federal estate tax imposed on property transferred at death to a spouse, regardless of the amount.

As a general rule, a lump-sum death benefit, or the present value of an annuity payable to a beneficiary from a qualified plan, is includable in the estate of a deceased participant for federal estate tax purposes. For some high-income participants, avoiding federal estate taxes on the plan benefit will be important. Their estates may be large enough to attract imposition of some federal estate tax. The marital deduction may not be significant, because they may not wish to pay the plan benefit to a spouse—they may be widowed or divorced or may wish to provide for another beneficiary. Also, even if the benefit is payable to a spouse, a spouse is often about the same age as the decedent, and thus within relatively few years most of the property transferred to the spouse is potentially subject to federal estate tax again at the spouse's death. As a result, it is often useful to design a qualified plan death benefit that can be excluded from the participant's estate.

The general rule of the federal estate tax is that all items of property are includable unless a specific code provision excludes them. Thus, qualified plan death benefits are generally includable because there is no specific exclusion. However, the estate tax law does have a specific provision dealing with life insurance, Section 2042. Under Section 2042, life insurance proceeds are includable in a decedent's estate if the decedent has "incidents of ownership" in the insurance policies. Incidents of ownership are various rights under the policy, particularly the right to designate the beneficiary. If a qualified plan death benefit is provided through a life insurance policy, in most places this provision would require inclusion because the participant retains the right to name the beneficiary. Noninsured death benefits presumably would not be excludable in any event.

LOANS FROM QUALIFIED PLANS

The law permits loans, within limits, to participants in regular qualified plans and Section 403(b) tax-deferred annuity plans. However, a participant cannot borrow from a plan unless the plan document specifically permits loans, and as discussed below, loan provisions may not be appropriate for all plans. Loans from IRAs and SEPs are effectively prohibited; they are treated as taxable distributions and may be subject to penalties for premature distribution. Also, loans from a qualified plan to an owner/employee (a proprietor or more than 10 percent partner in an unincorporated business) or to an employee of an S corporation who is a more-than-5-percent shareholder in the corporation are prohibited transactions subject to the prohibited transaction penalties.

Terms of Loans

To obtain loan treatment, the loan must be repayable by its terms within five years. The rule noted above for reducing the $50,000 limit by the loan balance in the preceding year was designed to prevent avoidance of the five-year limit by simply repaying and then immediately reborrowing the same amount every five years. The five-year requirement does not apply to any loan used to acquire a principal residence of the participant.

Transactions with an effect similar to that of loans (for example, the pledging of an interest in a qualified plan or a loan made against an insurance contract purchased by a qualified plan) are also covered by the loan limitations and rules.

If the plan permits loans, they must be made available on a nondiscriminatory basis. Also, the loans must be adequately secured and bear a reasonable rate of interest. Usually, the security for a plan loan is simply the participant's vested accrued plan benefit. Interest on the loan is generally consumer interest that is not deductible as an itemized deduction unless secured by a home mortgage. However, if the loan is to a key employee as defined in the top-heavy rules or is secured by 401(k) or 403(b) elective deferrals, interest is not deductible in any event.

Any loan that does not meet these requirements will be treated as a current distribution and may be currently taxable to the employee when received.

Should the Plan Permit Loans?

Whether the plan should permit loans depends on the employer's objectives for the plan. Plan loan provisions are often desired by the controlling employees of closely held businesses because a plan loan provides the advantage of tax sheltering the plan funds without losing control of the cash. However, the same considerations may make plan loans desirable for regular employees as well. A disadvantage of plan loans is that if they are too extensively utilized, they deplete the plan funds available for investment. More fundamentally, however, plan loan provisions are inconsistent with a primary plan objective of providing retirement security. Thus, they are less common in pension plans than in profit-sharing plans. Plan loan provisions are particularly uncommon in defined-benefit plans because such plans have no individual participant accounts; it is complicated to convert a participant's vested accrued benefit to a cash equivalent at a given time to determine the amount of loan that can be allowed. Plan loans also add significant administrative costs to the plan.

QUALIFIED PLANS FOR OWNERS OF UNINCORPORATED BUSINESSES

The owner of an unincorporated business often works full time or performs substantial services for the business as its proprietor or one of its partners. However, under the law such a person is not technically an employee of the business, but is referred to instead as a self-employed person. For many years, partners and proprietors were not eligible to be covered under qualified plans adopted by their unincorporated businesses. Beginning in 1962, qualified plan coverage was allowed, but only under very restricted conditions. In particular, there was a relatively low limit on the amount that could be contributed to the plan (or on the benefit provided by the plan) for partners and proprietors. The special plans designed under these restrictions were known as Keogh or HR-10 plans. These restrictions were enough to induce many unincorporated businesses to incorporate, simply so that the partner or proprietor could become a legally recognized employee of the business and be eligible for full qualified plan coverage. However, for plan years beginning after 1983, most of these previous restrictions were eliminated and partners and proprietors were able to participate fully in qualified plans adopted by their unincorporated businesses. There are, however, a few differences in the treatment of unincorporated businesses, most of them related to basic differences in the form of business.

Earned Income

An unincorporated business is not treated for federal income tax purposes as a taxable entity but rather as a conduit for passing the business's taxable income or loss through to the partners or proprietor. By comparison, a corporation is a tax-paying entity, and income can be passed through to owners only in the form of salaries representing reasonable compensation for services rendered or as dividends. Because of this difference, plan benefits or contributions for partners and proprietors are based on a defined amount referred to as earned income, which is intended to be comparable to the compensation that employees receive.

Earned income is the partner's or proprietor's share of the net earnings of the business after taking all appropriate business deductions, and without including nontaxable income. However, earned income includes only earnings with respect to the trade or business in which the personal services of the partner or proprietor are a material income-producing factor. For example, the net profits of an investment type business could not be treated like compensation in order to provide a benefit under a qualified plan for a partner who provided no personal services to the business.

The fact that earned income is determined after all business deductions creates a computational complication. Business deductions include the plan contribution itself, as well as one-half the Social Security self-employment tax that is based on net income [Code Section 164(f)]. An illustration will show this without getting into the details of the algebra.

Dot Matrix is a self-employed computer consultant with no regular employees. She earned $100,000 of net income in 2000, not counting her Keogh plan contribution and the deduction for self-employment tax. Her deduction for self-employment tax is $6,063.48. The Keogh plan is a money-purchase plan calling for an annual contribution of 25 percent of earned income. How much can Dot contribute? The answer is $18,787.31. This amount is 25 percent of Dot's earned income. Her earned income is equal to

• Initial net income			$100,000.00
  Less	Self-employment tax deduction	$ 6,063.48
  	Keogh contribution	18,787.31
  Earned income			$ 75,149.21

Insurance

Another group of special rules applies to a qualified plan providing insurance for a partner or proprietor. No deduction can be taken by the business for plan contributions that are allocatable to the purchase of incidental life, health, or accident insurance for the partner or proprietor. If cash-value life insurance is used, the deduction is denied for the portion of the premium allocatable to pure insurance protection, but the remainder of the premium is deductible as a plan contribution. The amounts not deducted are taxable income to the business owners, because all taxable income of a partnership or proprietorship flows through to the individual owners. Therefore, there are no PS 58 costs to include in the owner's income if insurance has been purchased because the full cost of the insurance has already been included in the owner's income. However, unlike regular employees, the owners do not obtain a cost basis for the cost of the insurance to apply to any distribution from the qualified plan.

GOVERNMENT REGULATION OF QUALIFIED PLANS

Qualified retirement plan receives special federal tax benefits in return for being designed in accordance with rules imposed by the federal government.We will discuss how the federal government imposes these rules. The federal rules are the most important because federal law generally preempts state and local laws in the qualified plan area.

Benefit planners need a basic understanding of the federal regulatory scheme. Planners must often interpret the significance of various official rules and interact with government organizations. These government rules and organizations must be understood in order to be effective in plan design and management.

Government regulation is expressed through the following, in the order of their importance: (1) statutory law, (2) the law as expressed in court cases, (3) regulations of government agencies, and (4) rulings and other information issued by government agencies.

Statutory Law

Theoretically, the highest level of regulatory law is the U.S. Constitution because all regulation must meet constitutional requirements, such as due process of law and equal protection for persons under the law. However, relatively few issues of federal regulation are actually resolved under constitutional law. For practical purposes, the "law" as expressed by statutes passed by the U.S. Congress is the highest level of authority and is the basis of all regulation; court cases, rulings, and regulations are simply interpretations of statutes passed by Congress. If the statute was detailed enough to cover every possible case, there theoretically wouldn't be any need for anything else. But despite the best efforts of Congressional drafting staffs, the statutes can't cover every situation.

Benefit planners should become as familiar as possible with statutory law because it is the basis for all other rules, regulations, and court cases. One of the main causes for confusion among nonexperts is a lack of understanding of the relative status of sources of information. That is, while a rule found in the Internal Revenue Code is fundamental, a statement in an IRS ruling or instructions to IRS forms may be merely a matter of interpretation that is relatively easy to "plan around."

In the benefits area, the sources of statutory law are:

• Internal Revenue Code (the Code). The tax laws governing the deductibility and taxation of pension and employee benefit programs are fundamental. These are found primarily in Sections 401–425, with important provisions also in Sections 72, 83, and other sections.

• ERISA (Employee Retirement Income Security Act of 1974), as amended, and other labor law provisions. Labor law provisions such as ERISA govern the nontax aspects of federal regulation. These involve plan participation requirements, notice to participants, reporting to the federal government, and a variety of rules designed to safeguard any funds that are set aside to pay benefits in the future. There is some overlap between ERISA and the Code in the area of plan participation, vesting, and prohibited transactions.

• Pension Benefit Guaranty Corporation (PBGC). The PBGC is a government corporation set up under ERISA in 1974 to provide termination insurance for participants in qualified defined-benefit plans up to certain limits. In carrying out this responsibility, the PBGC regulates plan terminations and imposes certain reporting requirements on covered plans that are in financial difficulty or in a state of contraction.

• Securities laws. The federal securities laws are designed to protect investors. Benefit plans may involve an element of investing the employees' money. While qualified plans are generally exempt from the full impact of the securities laws, if the plan holds employer stock, a federal registration statement may be required and certain securities regulations may apply.

• Civil rights laws. Benefit plans are part of an employer's compensation policies; these plans are subject to the Civil Rights Act of 1964, which prohibits employment discrimination on the basis of race, religion, sex, or national origin.

• Age discrimination. The Age Discrimination Act of 1978, as amended, has specific provisions aimed at benefit plans.

• State legislation. ERISA contains a broad "preemption" provision under which any state law in conflict with ERISA is preempted—has no effect. If ERISA does not deal with a particular issue, however, there may be room for state legislation. For example, there is considerable state legislation and regulation governing the types of group term life insurance contracts that can be offered as part of an employer plan. There are also certain areas where states continue to assert authority even though ERISA also has an impact, as in the area of creditors' rights to pension fund assets.

Court Cases

The courts enter the picture when a taxpayer decides to appeal a tax assessment made by the IRS. The courts don't act on their own to resolve tax or other legal issues. Consequently, the law as expressed in court cases is a crazy-quilt affair that offers some answers but often raises more questions than it answers. However, after statutes, court cases are the most authoritative source of law. Courts can and do overturn regulations and rulings of the IRS and other regulatory agencies.

A taxpayer wishing to contest a tax assessment has three choices: (1) the Federal District Court in the taxpayer's district, (2) the United States Tax Court, or (3) the United States Claims Court. Tax law can be found in the decisions of any of these three courts.

All three courts are equally authoritative. Most tax cases, however, are resolved by the U.S. Tax Court, because it offers a powerful advantage: The taxpayer can bring the case before the Tax Court without paying the disputed tax. All the other courts require payment of the tax followed by a suit for refund.

Decisions of these three courts can be appealed to the Federal Court of Appeals for the applicable federal "judicial circuit"—the U.S. is divided into 11 judicial circuits. The circuit courts sometimes differ on certain points of tax law; as a result, tax and benefit planning may depend on what judicial circuit the taxpayer is located in. Where these differences exist, one or more taxpayers will eventually appeal a decision by the Court of Appeals to the United States Supreme Court to resolve differences of interpretation among various judicial circuits, but this process takes many years and the Supreme Court may ultimately choose not to hear the case. Congress also sometimes amends the Code or other statute to resolve these interpretive differences.

Regulations

Regulations are interpretations of statutory law that are published by a government agency; in the benefits area, the most significant regulations are published by the Treasury Department (the parent of the IRS), the Labor Department, and the PBGC.

Regulations are structured as abstract rules, like the statutory law itself. They are not related to a particular factual situation, although they often contain useful examples that illustrate the application of the rules. Currently, Treasury regulations are often issued in question-and-answer form.

The numbering system for regulations is supposed to make them more accessible by including an internal reference to the underlying statutory provision. For example, Treasury Regulation Section 1.401(k)-2 is a regulation relating to Section 401(k) of the Internal Revenue Code. Labor Regulation Section 2550.408b-3 relates to Section 408b of ERISA.

Issuance of regulations follows a prescribed procedure involving an initial issuance of proposed regulations followed by hearings and public comment, then final regulations. The process often takes years. Where taxpayers have an urgent need to know answers, the agency may issue temporary regulations instead of proposed regulations. Technically, temporary regulations are binding, while proposed regulations are not. However, if a taxpayer takes a position contrary to a proposed regulation, the taxpayer is taking the risk that the regulation will ultimately be finalized and be enforced against him.

Rulings and Other Information

IRS Rulings

IRS rulings are responses by the IRS to requests by taxpayers to interpret the law in light of their particular fact situations. A General Counsel Memorandum (GCM) is similar to a ruling, except that the request for clarification and guidance is initiated from an IRS agent in the field during a taxpayer audit, rather than directly from the taxpayer.

There are two types of IRS rulings—Revenue Rulings, which are published by the IRS as general guidance to all taxpayers, and Private Letter Rulings (PLRs), which are addressed only to the specific taxpayers who requested the rulings. The IRS publishes its Revenue Rulings in IRS Bulletins (collected in Cumulative Bulletins [CB] each year). Revenue rulings are binding on IRS personnel on the issues covered in them, but often IRS agents will try to make a distinction between a taxpayer's factual situation and a similar one covered in a ruling if the ruling appears to favor the taxpayer.

PLRs are not published by the IRS, but are available to the public with taxpayer identification deleted. These "anonymous" PLRs are published for tax professionals by various private publishers. They are not binding interpretations of tax law except for the taxpayer who requested the ruling, and even then they apply only to the exact situation described in the ruling request and do not apply to even a slightly different fact pattern involving the same taxpayer. Nevertheless. PLRs are very important in research because they are often the only source of information about the IRS position on various issues.

Other Rulings

The Department of Labor and the PBGC issue some rulings in areas of employee benefit regulation under their jurisdiction. DOL rulings include the Prohibited Transaction Exemption (PTEs) which rule on types of transactions that can avoid the prohibited transaction penalties—for example, sale of life insurance contracts to qualified plans.

Other Information

Because of frequent changes in the tax law, the IRS has been unable to promulgate regulations and rulings on a timely basis, and has increasingly used less formal approaches to inform taxpayers of its position. These include various types of published Notices and even speeches by IRS personnel. Finally, many important IRS positions are found only in IRS Publications (pamphlets available free to taxpayers) and instructions for filling out IRS forms. The IRS also maintains telephone question-answering services, but the value of these for information on complicated issues is minimal.

CLASSIFICATION OF QUALIFIED PLANS

There are two broad classifications of qualified plans. The first classification differentiates between pension plans and profit-sharing plans and the second between defined-benefit and defined-contribution plans. These broad classifications are useful in identifying plans that meet broad overall goals of the employee. Once detailed employer objectives have been determined, a specific qualified plan program can be developed for the employer using one or more of the types of plans from a menu of specific plan types. The specific plan types contain a lot of flexibility in design to meet employer needs, and one or more different plans or plan types can be designed covering the same or overlapping groups of employees to provide the exact type of benefits that the employer desires.

Pension and Profit-Sharing Plans

One way of broadly classifying qualified plans is to distinguish between pension plans and profit-sharing plans. A pension plan is a plan designed primarily to provide income at retirement. Thus, benefits are generally not available from a pension plan until the employee reaches a specified age, referred to as the normal retirement age. Some plans also provide an optional benefit at an earlier age (the early retirement age). The design of a pension plan benefit formula must be such that an employee's retirement benefit is reasonably predictable in advance. Because the object of a pension plan is to provide retirement security, the employer must keep the fund at an adequate level. Pension plans are subject to the minimum funding rules of the Code, and these generally require that the employer make regular deposits to avoid a penalty.

By contrast, a profit-sharing plan is designed to allow a relatively short-term deferral of income; it is a somewhat more speculative benefit to the employee because the employer's contribution can be based on profits. Furthermore, a profit-sharing plan can provide for a totally discretionary employer contribution so that even if the employer has profits in a given year, the employer need not make a contribution for that year. The minimum funding rules do not apply. However, there must be substantial and recurring contributions or the plan will be deemed to be terminated.

In a profit-sharing plan, it is difficult to determine the employee's benefit in advance, and the plan is considered more an incentive to employees than a predictable source of retirement income. Because it is not exclusively designed for retirement income, employees may be permitted to withdraw funds from the plan before retirement. The plan may allow amounts to be withdrawn as early as two years after the employer has contributed them to the plan. However, as with any qualified plan, preretirement withdrawals may be subject to a 10 percent penalty. Finally, the deductible annual employer contribution is limited to 15 percent of payroll, an amount less than would usually be deductible under a pension plan.

Defined-Benefit and Defined-Contribution Plans

Qualified plans are also divided into defined-benefit and defined-contribution plans. A defined-contribution plan has an individual account for each employee; defined-contribution plans are, therefore, sometimes referred to as individual-account plans. The plan document describes the amount the employer will contribute to the plan, but it does not promise any particular benefit. When the plan participant retires or otherwise becomes eligible for benefits under the plan, the benefit will be the total amount in the participant's account, including past investment earnings on the amounts put into the account. The participant can look only to his or her own account to recover benefits; he or she is not entitled to amounts in any other account. Thus, the participant bears the risk of bad plan investments.

In a defined-benefit plan the plan document specifies the amount of benefit promised to the employee at normal retirement age. The plan itself does not specify the amount the employer must contribute annually to the plan. The plan's actuary will determine the annual contribution required so that the plan fund will be sufficient to pay the promised benefit as each participant retires. If the fund is inadequate, the employer is responsible for making additional contributions. There are no individual participant accounts, and each participant has a claim on the entire fund for the defined benefit. Because of the actuarial aspects, defined-benefit plans tend to be more complicated and expensive to administer than defined-contribution plans.

Specific Types of Qualified Plans

As Figure 1 indicates, within the broad categories (pension, profit-sharing, defined-benefit, defined-contribution), there are specific types of plans available to meet various retirement-planning objectives.

Figure 1: Types of Qualified Plans

Defined-Benefit Pension Plan

All defined-benefit plans are pension plans; they are designed primarily to provide income at retirement. A defined-benefit plan specifies the benefit in terms of a formula, of which there are many different types. Such formulas may state the benefit in terms of a percentage of earnings measured over a specific period of time, and might also be based on years of service. For example, a defined-benefit plan might promise a monthly retirement benefit equal to 50 percent of the employee's average monthly earnings over the five years prior to retirement. Or instead of a flat 50 percent, the plan might provide something like 1.5 percent for each of the employee's years of service, with the resulting percentage applied to the employee's earnings averaged over a stated period. Employer contributions to the plan are determined actuarially. Thus, for a given benefit, a defined-benefit plan will tend to result in a larger employer contribution on behalf of employees who enter the plan at older ages, because there is less time to fund the benefit for them.

Cash-Balance Pension Plan

In a cash-balance plan (also called a guaranteed account plan and various other titles), each participant has an "account" that increases annually as a result of two types of credits: a compensation credit, based on the participant's compensation, and an interest credit equal to a guaranteed rate of interest. As a result of the guarantee, the participant does not bear the investment risk. Unlike defined-benefit formulas, the plan deposits are not based on age, and younger employees receive the same benefit accrual as those hired at older ages. The plan is funded by the employer on an actuarial basis; the plan fund's actual rate of investment return may be more or less than the guaranteed rate, and employer deposits are adjusted accordingly. Technically, because of the guaranteed minimum benefit, the plan is treated as a defined-benefit plan. From the participant's viewpoint, however, the plan appears very similar to a money-purchase plan, described below.

Target-Benefit Pension Plan

A target plan uses a benefit formula (the "target") like that of a defined-benefit plan. However, a target plan is a defined-contribution plan and, therefore, the benefit consists solely of the amount in each employee's individual account at retirement. Initial contributions to a target plan are determined actuarially, but the employer does not guarantee that the benefit will meet the target level, so the initial contribution level is not adjusted to reflect actuarial experience. Like a defined-benefit plan, a target-benefit plan provides a relatively higher contribution on behalf of employees entering the plan at older ages.

Money-Purchase Pension Plan

A money-purchase pension plan is a defined-contribution plan that is in some ways the simplest form of qualified plan. The plan simply specifies a level of contribution to each participant's individual account. For example, the plan might specify that the employer will contribute each year to each participant's account an amount equal to 10 percent of that participant's compensation for the year. The participant's retirement benefit is equal to the amount in the account at retirement. Thus, the account reflects not only the initial contribution level but also any subsequent favorable or unfavorable investment results obtained by the plan fund. The term money purchase arose because in many such plans, the amount in the participant's account at retirement is not distributed in a lump sum but rather is used to purchase a single or joint life annuity for the participant.

Profit-Sharing Plan

As described earlier, the significant features of a profit-sharing plan are that employer contributions are, within limits, discretionary on the part of the employer and that employee withdrawals before retirement may be permitted. Profit-sharing plans that are designed to allow employee contributions are sometimes referred to as savings or thrift plans.

Section 401(k) Plan

A Section 401(k) plan, also called a cash or deferred plan, is a plan allowing employees to choose (within limits) to receive compensation either as current cash or as a contribution to a qualified profit-sharing plan. The amount contributed to the plan is not currently taxable to the employee. Such plans have become popular because of their flexibility and tax advantages. However, such plans must include restrictions that may be burdensome to the employer or the employees. The most significant restrictions are a requirement of immediate vesting for amounts contributed under the employee election and restrictions on distribution of these amounts to employees prior to age 59½.

Stock Bonus Plan

The stock bonus plan resembles a profit-sharing plan except that employer contributions are in the form of employer stock rather than cash and the plan fund consists primarily of employer stock.

The fiduciary requirements of the pension law forbid an employer to invest more than 10 percent of a pension plan fund in stock of the employer company. This prevents the employer from utilizing pension plan funds primarily for financing the business rather than providing retirement security for employees. However, the 10 percent restriction does not apply to profit-sharing or stock bonus plans.

Stock bonus plans are intended specifically to give employees an ownership interest in the company at relatively low cost to the company. Stock bonus plans are also used by closely held companies to help create a market for stock of the employer.

ESOP

Employee stock ownership plans (ESOPs) are similar to stock bonus plans in that most or all of the plan fund consists of employer stock: employee accounts are stated in shares of employer stock. However, ESOPs are designed to offer a further benefit: the employer can use an ESOP as a mechanism for financing the business through borrowing or "leveraging." Various tax incentives exist to encourage this.

TAX BENEFITS OF QUALIFIED PLANS

The most important tax advantage of a qualified plan is best understood by comparison with the rules applicable to a nonqualified deferred compensation plan. In a nonqualified plan, the timing of the employer's income tax deduction for compensation of employees depends on when the compensation is included in the employee's income. If the employer puts no money aside in advance to fund the plan, there is no deduction to the employer until the retirement income is paid to the employee, at which time the employee also reports the compensation as taxable income. If the employer puts money aside into an irrevocable trust fund, insurance contract, or similar fund for the benefit of the employee, the employer can get an immediate tax deduction, but then the employee is taxed immediately; there is no tax deferral for the employee.

These rules do not apply to a qualified plan. In a qualified plan, the employer obtains a tax deduction for contributions to the plan fund (within specified limits) for the year the contribution is made. Employees pay taxes on benefits when they are received. The combination of an immediate employer tax deduction plus tax deferral for the employee can be obtained only with a qualified plan.

Besides this basic advantage, there are other tax benefits for qualified plans. Four advantages are usually identified:

• The employer gets an immediate deduction, within certain limits, for amounts paid into the plan fund to finance future retirement benefits for employees.

• The employee is not taxed at the time the employer makes contributions for that employee to the plan fund.

• The employee is taxed only when plan benefits are received. If the full benefit is received in a single year, it may be eligible for special favorable "lump sum" income taxation.

• Earnings on money put aside by the employer to fund the plan are not subject to federal income tax while in the plan fund; thus the earnings accumulate tax free.