A 401(k) Plan is an expanded version of a profit sharing plan. This arrangement allows eligible employees the opportunity to fund their own retirement benefit by electing to reduce their current salary and having the amount paid to an individual account by the employer. The employee contributions or 401(k) deferrals are treated as employer contributions and are exempt from Federal or State income taxes. Employer matching contributions encourage employees to make 401(k) deferrals to increase their benefit at retirement. In addition, the employer has the option to contribute a discretionary profit sharing amount.
There have been several modifications to 401(k) plans, to encourage employers and participants, including the expansion of safe harbor design, automatic enrollment features and the addition of ROTH contributions.
A Profit Sharing Plan allows employees to share in the profits of the company. However, employer contributions to the plan are not required on current or accumulated profits. While the company is not required to contribute and the dollar amount of contribution is purely discretionary, the method of allocation to individual accounts must be pre-determined and cannot be discretionary. The most typical method of allocation is based on the participant's salary. Benefits are paid from the individual account balances at retirement.
A New Comparability/Cross-Tested Plan is a Profit Sharing plan that allows the employer to establish predetermined groups such as shareholder employees, management and staff employees. Each pre-determined group receives a uniform percentage of their annual compensation. This method must satisfy the annual IRS discrimination test.
An Age Weighted Profit Sharing Plan is a design to maximize the contributions to older, highly compensated employees while limiting contributions to younger employees. This is achieved through an allocation formula which considers age as well as salary, rather than salary alone as in a typical profit sharing plan. All of the features found in a traditional profit sharing plan are retained including the advantage of discretionary employer contributions.
A Defined Benefit/Cash Balance Plan is designed to provide participants with a definite benefit at the normal retirement age. Benefits typically increase with the length of service and/or the participant's salary. At retirement, the amount of the benefit is stated in terms of a specified monthly dollar amount that will continue for the participant's life. Alternative forms of payment are also available. Annual contributions are actuarially determined based on assumed interest rates, employee turnover, salary increases and mortality. Legislative changes have impacted the cost and complexity of Defined Benefit plans for many large employers, but, they often make sense for small employers.
Types of Retirement Plans
There have been several modifications to 401(k) plans, to encourage employers and participants, including the expansion of safe harbor design, automatic enrollment features and the addition of ROTH contributions.
A Profit Sharing Plan allows employees to share in the profits of the company. However, employer contributions to the plan are not required on current or accumulated profits. While the company is not required to contribute and the dollar amount of contribution is purely discretionary, the method of allocation to individual accounts must be pre-determined and cannot be discretionary. The most typical method of allocation is based on the participant's salary. Benefits are paid from the individual account balances at retirement.
A New Comparability/Cross-Tested Plan is a Profit Sharing plan that allows the employer to establish predetermined groups such as shareholder employees, management and staff employees. Each pre-determined group receives a uniform percentage of their annual compensation. This method must satisfy the annual IRS discrimination test.
An Age Weighted Profit Sharing Plan is a design to maximize the contributions to older, highly compensated employees while limiting contributions to younger employees. This is achieved through an allocation formula which considers age as well as salary, rather than salary alone as in a typical profit sharing plan. All of the features found in a traditional profit sharing plan are retained including the advantage of discretionary employer contributions.
A Defined Benefit/Cash Balance Plan is designed to provide participants with a definite benefit at the normal retirement age. Benefits typically increase with the length of service and/or the participant's salary. At retirement, the amount of the benefit is stated in terms of a specified monthly dollar amount that will continue for the participant's life. Alternative forms of payment are also available. Annual contributions are actuarially determined based on assumed interest rates, employee turnover, salary increases and mortality. Legislative changes have impacted the cost and complexity of Defined Benefit plans for many large employers, but, they often make sense for small employers.
Types of Retirement Plans
- A 401(k) Plan
- A Profit Sharing Plan
- A New Comparability/Cross-Tested Plan
- An Age Weighted Profit Sharing Plan
- A Defined Benefit/Cash Balance Plan
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