Whether you are a sole proprietor, 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.
Here is general information about the most popular types of retirement programs. Our consultants will help you choose the plan that is best for you. Click below to learn more about qualified retirement plans.
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 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.
Instead of accumulating contributions and earnings in an individual account like defined contribution plans (profit sharing, 401(k), money purchase), a defined benefit plan promises the employee a specific monthly benefit payable at the retirement age specified in the plan. Defined benefit plans are usually 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.
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.
These 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 who want to maximize contributions to owners and higher paid employees while minimizing those for all other employees.
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 ($18,000 in 2017 and $18,500 in 2018).
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 25% of the total compensation of all eligible employees.
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.
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: