Plan Descriptions

Here is general information about the most popular types of retirement programs. Our consultants can help you choose the plan that is best for you.

Qualified Retirement Plans

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

  • Employer contributions to the plan are tax deductible.
  • Earnings on investments accumulate tax-free which allows 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 pretax contributions to certain types of plans.
  • Ongoing plan expenses are tax deductible.

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

  • Attract experienced employees in a very competitive job market--retirement plans are fast becoming 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 inadequate to support a reasonable lifestyle for most retirees.
  • Plan assets are protected from creditors.

Employers can choose between two basic types of retirement plans, defined contribution and defined benefit, which are described below. Both a defined benefit and defined contribution plan may be sponsored to maximize benefits. Our consultants can help you choose the right plan for your company.

Defined Contribution Plans

A defined contribution plan defines the contribution the company will make to the plan and how the contribution will be allocated among the eligible employees. Separate account balances are maintained for each employee. The employee's account grows through employer contributions, investment earnings and in some cases forfeitures (amounts from the non-vested accounts of terminated participants). Some plans may also permit employees to make contributions on a before-and/or after-tax basis.

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

Employer account balances may be subject to a vesting schedule. Non-vested account balances forfeited by terminating employees can be used to reduce employer contributions or be reallocated to active participants.

The maximum annual amount that may be credited to an employee's account (taking into consideration all defined contribution plans sponsored by the employer) is limited to the lesser of 25% of compensation or $50,000 for 2012.

Although the percentage limit has substantially increased from 25% to 100%, there are still tax deduction limits that must be taken into consideration. For example, the maximum profit sharing deduction limit is 25% of compensation. For an employee earning $100,000, the maximum deductible employer contribution would be $25,000 (25% x $100,000). However, the employee could also make an $11,000 401(k) contribution to the plan. As a result the total amount credited to his account for the year would be $36,000 (36% of his compensation), and he would satisfy the maximum annual limit since total contributions are less than $50,000.

Profit Sharing Plans

The profit sharing plan is one of the most flexible qualified plans 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 15% of the total compensation of all eligible employees. Beginning in 2002, the contribution limit will increase to 25% of compensation.

The contribution is usually allocated to employees in proportion to compensation and may be integrated with Social Security which results in larger contributions for higher paid employees.

Age-Weighted Profit Sharing Plans: Profit sharing plans may also use an age-weighted allocation formula that takes into account each employee's age and compensation. This formula results in a significantly larger allocation of the contribution to employees who are closer to retirement age. Age-weighted profit sharing plans combine the flexibility of a profit sharing plan with the ability of a pension plan to skew benefits in favor of older employees.

401(k) Plans

More and more employees perceive 401(k) plans as a valuable benefit which have made them the most popular retirement plans today. Employees can benefit from a 401(k) plan even if the employer makes no contribution. Employees voluntarily elect to make pre-tax contributions through payroll deductions up to an annual maximum limit ($16,500 in 2011, $17,000 in 2012).

Employees age 50 and older are able to defer an additional $5,500 (referred to as "catch-up contributions").

Often the employer will match some portion of the amount deferred by the employee to encourage greater employee participation, i.e., 25% match on the first 4% deferred by the employee. 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. Many employers offer employees the opportunity to take hardship withdrawals or borrow from the plan.

Employee and employer matching contributions are subject to a special nondiscrimination test which limits how much the group of employees referred to as "Highly Compensated Employees" can defer based on the amount deferred by the "Non-Highly Compensated Employees." The plan may be designed to satisfy "401(k) Safe Harbor" requirements (certain minimum employer contributions and 100% vesting of employer contributions) which can eliminate this nondiscrimination test.

Employee Stock Ownership Plans (ESOP)

An ESOP is a type of profit sharing plan that is required to invest primarily in the employer's stock. Although the rules surrounding an ESOP are somewhat unique and differ from those which apply to a regular profit sharing plan, the general principals are the same.

As the name implies, employees have some ownership in the employer. As owners, employees may be more motivated to improve corporate performance because they can benefit directly from company profitability.

Money Purchase Pension Plans

A money purchase pension plan operates like a profit sharing plan. The major difference is that, unlike profit sharing plans where employers are permitted to make discretionary contributions each year, the employer has a set contribution rate which is stated in the plan document. These mandatory contributions must be made each year regardless of the employer's profits. Failure to make a contribution can result in the imposition of penalties.

Contributions are generally based on a fixed percentage of each employee's compensation. For tax deduction purposes, the company contribution cannot exceed 25% of compensation to a maximum of $49,000 per employee in 2011, increasing to $50,000 in 2012. The contribution may be integrated with Social Security which results in larger contributions for higher paid employees.

New Comparability Plans

These plans, sometimes referred to as "cross-tested plans," are profit sharing or money purchase pension plans (defined contribution 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 defined contribution nondiscrimination testing. New comparability plans are generally utilized by small businesses who want to maximize contributions to owners and higher paid employees while minimizing those for all other employees.

Employees are separated into two or more identifiable groups such as owners and non-owners. Each group may receive a different contribution percentage. For example, a higher contribution may be given to the owner group than the non-owner group, as long as the plan satisfies the nondiscrimination requirements.