TYPES OF EMPLOYEE BENEFIT PLANS
RETIREMENT PLANS
- Profit Sharing Plans
- 401(k) Profit Sharing Plans
- Age-Weighted Profit Sharing Plans
- Defined Benefit Plans
- Target Benefit Plans
- Money Purchase Pension Plans
- Non-Qualified Deferred Compensation Plans
CAFETERIA PLANS
- Premium Conversion Only Plans
- Flexible Spending Account Plans
l Medical Reimbursement Account Plans
l Child and Dependent Care Account PlansProfit Sharing Plans
A profit sharing plan enables employees to share in the profits of the company. However, employer contributions to the plan are not required to be based 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. However, tailored formulas integrated with Social Security often provide for permitted disparity in the allocation formula. Benefits are paid from individual account balances at retirement.
401(k) Profit Sharing Plans
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 to have the amount paid to an individual account by the employer. The employee deferrals are treated as employer contributions and can be contributed without incurring Federal or State income taxes. In addition to the discretionary profit sharing contribution and salary deferrals by employees, a 401(k) plan allows for employer matching contributions based on the salary deferrals made by participants. Matching contributions encourage employees to make salary deferrals and contribute to their own retirement funds.
Age-Weighted Profit Sharing Plans
The purpose of an age weighted profit sharing plan is 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 profit sharing plan. In this respect, the plan mirrors a target benefit plan. However, all of the features found in a traditional profit sharing plan are retained, including the advantage of discretionary employer contributions.
Defined Benefit Pension Plans
A defined benefit pension 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 monthly specified dollar amount which will continue for the participant's life. Of course, alternative forms of payment are available. Annual contributions are actuarially determined based on assumed interest rates, employee turnover, salary increases and mortality.
Target Benefit Plan
A target benefit plan is a cross between a defined benefit plan and a money purchase plan. It is similar to a defined benefit plan in that contributions are required based on an actuarially determined retirement benefit. Thereafter, the contributions continue to be made under the original assumptions, without modification, even if experience demonstrates that the contributions will not produce the "targeted benefit". Like a money purchase plan, contributions once determined are allocated to individual accounts. Therefore, the benefit a participant receives at retirement is the balance in the account.
Money Purchase Pension Plans
A money purchase pension plan differs from a defined benefit plan by accumulating benefits in an individual account rather than accruing benefits based on length of service and/or salary. A money purchase plan will require sponsors to make contributions at least annually based on a fixed percentage of each eligible participant's salary. The retirement benefit is the total value of a participant's account on his normal retirement date. The account includes the participant's share of the employer contributions, a proportionate share of trust experience (gains/losses) and any re-allocation of non-vested forfeited accounts.
Non-Qualified Deferred Compensation Plans
A non-qualified deferred compensation plan is established primarily to provide retirement income to essential employees. There are no limits on benefits or contributions and the plans are not subject to the stringent non-discrimination standards of qualified retirement plans. Special tax treatment associated with qualified plans does not exist for non-qualified plans. If the employer makes contributions in advance, they do not become deductible until payment is made to the participant.
Premium Conversion Plans
A premium conversion cafeteria plan converts employee contributions to employer sponsored insurance programs to pre-tax payments. Many employers provide their employees with an attractive selection of group benefits but must limit their contributions to the programs if any company assistance is to continue. Implementing a premium conversion cafeteria plan is one way to help employees limit their contributions to the program as well. Once adopted the premium conversion plan enables employees to pay their share of the cost of group insurance with pre-tax dollars. Few limitations apply and employers benefit by decreasing their own payroll taxes (FICA and unemployment taxes). Quite often the savings incurred by sponsoring this type of arrangement pays for the administrative costs and produces added income to increase the employee's benefit options or decrease the out-of- pocket contribution by the company. One of the most attractive features seems to be the ability to increase the employee's contributions without decreasing his/her net compensation.
Flexible Spending Account Cafeteria Plans
A flexible spending account plan enables employees to pay typically taxable expenses with pre-tax dollars. The employee elects to redirect a portion of salary to be held in an account until an expense is incurred.
Some of the allowable expenses or "qualified benefits" which can be paid through a flexible spending account are out-of- pocket medical costs (Medical Reimbursement Account Plans), child care costs (Child and Dependent Care Account Plans), and vacation days. Out- of-pocket medical costs include expenses such as eye-glasses, dental work, prescriptions, etc. The plan sponsor once again benefits from the decrease in taxable payroll. Sponsoring a flexible spending account plan can make dollars available for expanded benefit plans or simply lower the out-of-pocket company contribution.
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