Types of Plans

Whether you are a sole proprietor, a partnership or a corporation, there are several types of qualified retirement plans that can meet your needs. A retirement plan can serve many purposes, from tax sheltering income to attracting and retaining employees. Our consultants will help you choose the plan that is best for you.

Qualified Retirement Plans

A qualified plan must meet a certain set of requirements set forth in the Internal Revenue Code such as minimum coverage, participation, vesting and funding requirements. In return, the IRS provides tax advantages to encourage businesses to establish retirement plans.

Tax Advantages Include:

  • Employer contributions to the plan are tax deductible.
  • Earnings on investments accumulate tax-deferred, allowing contributions and earnings to compound at a faster rate.
  • Employees are not taxed on the contributions and earnings until they receive the funds.
  • Employees may make pre-tax contributions to certain types of plans.
  • Ongoing plan expenses are tax deductible.

In addition, sponsoring a qualified retirement plan offers the following advantages:

  • Attract experienced employees in a very competitive job market: Retirement plans have become a key part of the total compensation package.
  • Retain and motivate good employees: You don’t want to lose them to your competitors because of the qualified plans they are offering.
  • Help employees save for their future since Social Security retirement benefits alone will be an inadequate source to support a reasonable lifestyle for most retirees.
  • Qualified plan assets are protected from creditors of the employer and employee.

Employers can choose between two basic types of retirement plans: defined contribution and defined benefit. Both a defined contribution and a defined benefit plan may be sponsored to maximize benefits.

Defined Contribution Plans

Under a defined contribution plan, the contributions to the plan are defined. The employee’s account grows through contributions and investment earnings. Some plans may also permit employees to make contributions on a before- and/or after-tax basis.

Since the contributions and investment results vary year by year, the future retirement benefit cannot be predicted. The employee’s retirement, death or disability benefit is based upon the amount in his or her account at the time the distribution is payable.

403b Plans

These plans are tax-advantaged retirement savings plans available for public education organizations, some non-profit employers (501(c)(3) organizations), cooperative hospital service organizations, and self-employed ministers in the United States. Although they are very similar to 401(k) plans, they do offer some advantages.

Salary-deferral contributions are not subject to complicated discrimination testing. 403(b) plans are instead subject to universal availability, which means all employees must be permitted to make salary-deferral contributions. 403(b)plans also have simpler annual governmental reporting requirements.

Not all 403(b) plans are subject to ERISA, so it's important to discuss all aspects of your plan with your Retirement Plan Consultant.

More and more employees view 401(k) plans as a valuable benefit which has made them the most popular type of retirement plan today. Employees can benefit from a 401(k) plan even if the employer makes no contribution. Employees can voluntarily elect to make pre-tax contributions through payroll deductions up to an annual maximum limit

Since a 401(k) plan is a type of profit sharing plan, profit sharing contributions may be made in addition to, or instead of, matching contributions.

401(k) Safe Harbor Plans

These are designed to satisfy nondiscrimination testing. Safe Harbor requirements include certain minimum employer contributions and 100% vesting of employer contributions. The benefit of eliminating the testing is that Highly Compensated Employees can defer up to the annual limit without concern for how much the Non-Highly Compensated Employees defer.

New Compatibility Plans (Cross-Tested)

New comparability plans, sometimes referred to as ```cross-tested plans``, are usually profit sharing plans that are tested for nondiscrimination as though they were defined benefit plans. By doing so, certain employees may receive much higher allocations than would be permitted by standard nondiscrimination testing. New comparability plans are generally utilized by small businesses that want to maximize contributions for owners and higher paid employees, while minimizing contributions for all other eligible employees.

Profit Sharing Plans

The profit sharing plan is generally the most flexible qualified plan that is available. Company contributions to a profit sharing plan are usually made on a discretionary basis. Each year the employer decides the amount, if any, to be contributed to the plan. For tax deduction purposes, the company contribution cannot exceed 25% of the total compensation of all eligible employees.

Defined Benefit Plans

Instead of accumulating contributions and earnings in an individual account like defined contribution plans, a defined benefit plan promises the employee a specific monthly benefit payable at the retirement age. Defined benefit plans are funded entirely by the employer. The employer is responsible for contributing enough funds to the plan to pay the promised benefits, regardless of profits and earnings.

Employers that want to shelter more than the annual defined contribution limit may want to consider a defined benefit plan since contributions can be substantially higher, resulting in a faster accumulation of retirement funds.

A cash balance plan is a type of defined benefit plan that resembles a defined contribution plan. For this reason, these plans are referred to as hybrid plans. A traditional defined benefit plan promises a fixed monthly benefit at retirement that is usually based upon a formula that takes into account the employee's compensation and years of service. A cash balance plan looks like a defined contribution plan because the employee's benefit is expressed as a hypothetical account balance instead of a monthly benefit.

Each employee's 'account' receives an annual contribution credit and an interest credit. At retirement, the employee's benefit is equal to the hypothetical account balance which represents the sum of all contributions and interest credits.

As in a traditional defined benefit plan, the employer bears the investment risks and rewards in a cash balance plan.

Employees appreciate this design because they can see their 'account' grow, but they are still protected against fluctuations in the market.