Small closely held companies that operate as a corporation can utilize a qualified pension or profit sharing plan to defer income of its employees and owners until retirement. In addition to tax advantages related to rollovers and income averaging for lump sum distributions that may be available, these plans provide significant current tax benefits.

A current tax deduction is allowed by the employer corporation for contributions made to a qualified plan. Employees do not recognize income on the contributions and the earnings on the account accumulate tax free. Qualified plans may also make loans to participants. These loans are not treated as taxable distributions as long as the terms call for repayment within 5 years and the loan does not exceed the allowable loan amount which is based on the vested benefit in the plan. The contributions and earnings are taxed to the employee when the funds are withdrawn at retirement.

Sponsoring employers assume fiduciary responsibility and incur some costs for administering the plan. In addition, contributions must not favor highly compensated employees or owners so the corporation must also cover rank and file employees.