Question

In at least 500 of your own words, explain the difference between qualified and nonqualified plans. Next, what are defined benefit and contribution plans? Finally, what are three broad classes of health insurance programs? Why are all these important to an employee?

Answer 1

1. Differences between qualified & non qualified plans:

Qualified plans: these are plans that are designed to offer individuals with tax benefits on top of their regular retirement plans. Under this employers deduct allowable portion of pre tax wages from the employees & the contributions & earnings then grow tax deferred until their withdrawal.

Non qualified plans: these are those that are not eligible for tax deferral benefits. On the other hand, deducted contributions from non qualified plans are generally taxed at the time of income recognition. This generally refers to when employees must pay income taxes on benefits associated with their employment.

2. Defined benefit & contribution plans:

A defined benefit plan also known as pension is a retirement account in which the employer ponies the entire employee’s money & promises a bulk payment at the time of retirement. On the other hand a contribution plan is like a 401(k) or 403(b) that requires the employee to put in their own money. The defined contribution plan category contains a broad range of plans including profit-sharing plans, money purchase plans, 401(k) plans, employee stock ownership (ESOP) plans and two types of plans especially popular with small businesses: SIMPLE plans and SEPs (simplified employee pensions).

A defined benefit plan would come in two types namely traditional pensions & cash balance plans. In both the cases you just show up the basic work & when the eligibility rules are met, the employee is automatically enrolled in the plan. The employee must stick on to a job for several years. The cash balance plan on the other hand credits with a percentage of the employee’s salary every year.

If you leave the company before retirement age, you may take the contents of your cash-balance plan as a lump sum and roll it into an IRA. A traditional pension isn’t portable.

3. The health insurance programs can be broken into two broad categories namely traditional & managed care. Under this category there are four types of plans namely:

• Traditional indemnity plans that are now called as fee for service plans.
• PPO or preferred provider organizations. These are generally lower fees with a network of healthcare providers. They give their policyholders financial incentive to stay within that particular network. As a result of this less money would come out of employee’s pocket & less paper work.
• POS or point of service plans. Point-of-service plans are similar to PPOs, but they introduce the gatekeeper, or Primary Care Physician. You'll need to choose your PCP from among the plan's network of doctors.
• HMO’s or health maintenance organizations. An HMO may have central medical offices or clinics, or it may consist of a network of individual practices. In general, you must see HMO-approved physicians or pay the entire cost of the visit yourself. HMOs have the best reputation for covering preventive care services and health improvement programs.

All these programs are important for the employees considering the rising medical costs of treatment. Investing in these plans also means investing in the future of the employees. If these plans are not available employees need to shell large amount of money out of their own pockets as a result of which majority of their salary goes on spending for hospitalization. Also these benefits are offered to the employees for retaining the best talent in the organization.