Colorado Life Producer License Practice Test

Which of the following is an advantage of a qualified retirement plan for an employer?

1. Contributions are non-deductible

2. Plans can discriminate benefits

3. Earnings are taxed at a higher rate

4. Contributions are tax-deductible

The correct answer is: Contributions are tax-deductible

An advantage of a qualified retirement plan for an employer is that contributions are tax-deductible. This means that any contributions made by the employer to the retirement plan can be deducted from the employer's taxable income, reducing their overall tax liability. This tax advantage not only encourages employers to participate in providing retirement benefits to their employees but also serves as an incentive for employers to establish qualified plans, as it can result in significant tax savings. It's important to recognize that qualified retirement plans must meet specific requirements to obtain this tax-deductible status. These plans often include features such as employer contributions that are vested over time and the provision of certain benefits that comply with federal regulations. This also distinguishes them from non-qualified plans, where employer contributions are not deductible, and the income tax treatment is not as favorable. In contrast to the other options, non-deductibility of contributions, discriminatory benefit plans, and higher tax rates on earnings are features that do not support the advantages that a qualified retirement plan provides for employers. These features are significant in understanding the value and appeal of qualified retirement plans, particularly in a competitive job market where offering attractive benefits can help with employee retention and recruitment.