Qualified Pension or Profit-Sharing Plan

Qualified Pension or Profit-Sharing Plan

An employer-sponsored plan that meets the requirements of IRS Code section 401. If these requirements are met, none of the employer's contributions to the plan are taxed to the employee until distributed to him. The employer is allowed a deduction in the year the contributions are made.
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Further, because H is paying the income tax out of his own pocket, in effect the $121,000 is growing income tax free as well, similar to a qualified pension or profit-sharing plan. This is helpful estate planning, in that H is reducing his taxable estate by the income tax paid, without that payment being deemed a gift.
Under the Internal Revenue Code and the Employee Retirement Income Security Act of 1974 (ERISA), excise taxes may be imposed on a qualified pension or profit-sharing plan that engages in "prohibited transactions," i.e, certain financial transactions between the plan and a "disqualified person." Disqualified persons include (among others) fiduciaries, persons providing services to the plan, the employer of persons covered by the plan, owners of the business sponsoring the plan and family members of such owners (Sec.
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