Companies That Buy Annuities
An annuity is an insurance policy. While they can be used by individuals as part of a personal savings plan, these financial products may also be used by companies. A company that uses an annuity policy normally uses the policy as a retirement plan set up for employees. These plans may be qualified under the Employee Retirement Income Security Act (ERISA) or used as non-qualified plans (plans not qualified under ERISA).
Other People Are Reading
-
Qualified Annuities
-
Qualified annuities are those annuities used inside of a retirement plan that is ERISA qualified. These plans sometimes receive favorable tax treatment on the contributions made to the plan. In particular, the contributions will be tax-deductible or pretax. Examples of these plans include SEP and SIMPLE IRA annuities, 403(b) annuities, and 412(i) plans. When money is withdrawn from these plans, the income is taxable at ordinary income tax rates. Some plans offer nondeductible contributions in exchange for tax-free income at retirement. These plans include Roth IRAs and Roth 403(b) plans.
Non-Qualified Annuities
-
Non-qualified annuities are annuities that are not qualified by ERISA. These plans allow employers to discriminate among employees. The employer decides who receives benefits and who does not. Contributions to the plan are not pretax or tax deductible. Instead, these plans defer compensation for the employee. Examples of these plans include non-qualified deferred compensation plans and executive bonus plans funded with annuities. When money is withdrawn from the plan, the employee receives this money as income, which is taxed at ordinary income tax rates for all money that was contributed and invested by the employer. Many employee contributions are not taxed when received, since they have already been taxed when contributed to the plan.
-
Benefits
-
The benefit of a qualified annuity plan is that the employee will, in many instances, have significant help from the employer in regard to retirement planning. The employer normally funds some or all of the annuity under a qualified plan. For pension plans like 412(i), the employer funds the entire amount. For 403(b) plans, the employer may fund part of the annuity.
The benefit of a non-qualified annuity is that the employer may choose who to give benefits to. An employer may reward his best employees or executives with additional retirement benefits above the qualified retirement benefits they receive.
Disadvantages
-
The disadvantage of a qualified plan is that these plans all have contribution limits. This might limit your ability to save money (and your employer's ability to contribute to your retirement) if you require significant savings. The disadvantage of non-qualified plans is that all contributions are made with nondeductible dollars when contributed. Less money is available for investing, which may result in lower total retirement savings when you retire.
-
