Individual K retirement plans are also referred to as a Qualified Plan or a Defined Contribution. An Individual K is a retirement plan created to allow small employers offer employees a way to make contributions for their own retirement. The Individual K was created for small businesses with a few employees or an owner only business. It is important to keep in mind that a qualified plan is subject to ERISA laws (Employee Retirement Income Security Act) which protect employees by requiring plan information be given to employees, provide fiduciary responsibilities, calls for plans to have a grievance and appeals process in place and gives participants the ability to sue for damages and breaches of their fiduciary duty. To not follow the plan means potential disqualification of the plan and large costs associated.
In order to set up an Individual K retirement plan, the employer must meet the following criteria:
- The Qualified Plan must be adopted by the last day of a calendar year.
- The Individual K retirement plan must be given to employees for their records and must clearly state any provisions.
Employee contributions and limits for tax year 2008 are:
- Before tax deferrals are referred to as Traditional deferrals. The participant cannot exceed $15,500 in elective deferrals unless they are over 50. An additional $5,000 can be made as a catch up contribution as long as the amount does not exceed the compensation made or that year.
- Roth deferrals are after tax salary deferrals. The plan must have the ability to handle this kind of deferral. The participant cannot exceed $15,500 in elective deferrals unless they are over 50. An additional $5,000 can be made as a catch up contribution as long as the amount does not exceed the compensation made or that year.
- The total amount that can be contributed to an Individual K plan is either $46,000 or 25% of all compensation. Both deferrals and any employer deductions are part of this amount.
For a Qualified Plan distribution, a triggering event is required. These distributions may be subject to a 20% mandatory Federal Withholding Tax depending on the situation. Examples are:
- Required Distributions due to age are not subject to the mandatory withholding.
- Distributions must have a reason for them to occur. This can be dependant on the plan documents. The qualifying triggers usually are:
- The employee retires, dies, becomes disables, or otherwise severs employment.
- The plan ends and no other defined contribution plan is established or continued.
- The employee has reached age 59 ½ or has suffered financial hardship.
Note that Publication 560 provides further clarification.
