Whether you are a sole proprietor, partnership or a corporation, there are several types of qualified retirement plans that can meet your needs. Their purpose can range from employee attraction and retention to tax sheltering income.
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 qualified plan must meet a certain set of requirements in the Internal Revenue Code such as minimum participation, vesting and funding requirements in order to gain the significant tax advantages.
- Employer contributions to the plan are tax deductible.
- Earnings on investments accumulate tax-deferred 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.
- Ongoing plan expenses are tax deductible.
In addition, sponsoring a qualified retirement plan has the following advantages:
- Attract employees in a very competitive job market: Many of our clients view it as a powerful hiring tool.
- Retain and motivate employees: A retirement plan often inhibits employees from moving over to your competitors.
- 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.
- Plan assets are protected from creditors.
- Staff feels employer truly is investing in them.
Employers choose between two types of retirement plans: Defined Contribution and Defined Benefit. Both a Defined Benefit and Defined Contribution plan may be sponsored to maximize benefits. We help you choose the right plan for your company. With our input you can decide the most effective fit.
Generally this is a Profit Sharing or 401-K Plan. A plan of this type 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).
Contributions, investment results and forfeiture allocations can vary year by year. 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 100% of compensation.
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 ($15,500 in 2007 and 2008).
The plan may also permit employees age 50 and older to make additional "catch-up contributions" up to an annual maximum limit ($5,000 in 2007 and 2008).
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." In general, employees who fall into the following two categories are considered to be Highly Compensated Employees:
- A more than 5% owner of the employer at any time during the current plan year or preceding plan year (stock attribution rules apply which treat an individual as owning stock owned by his spouse, children, grandchildren or parents); or
- An employee who received compensation in excess of the indexed limit in the preceding plan year ($100,000 for 2007). The employer may elect that this group be limited to the top 20% of employees based on compensation.
The Tiered Plan: Our niche and area of expertise is the Custom Designed Plan. Using state of the art IRS approved methods, many Defined Contribution plans can be designed to allocate an annual contribution that satisfy both the IRS and the client.
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.
Employers who want to shelter more than the annual Defined Contribution limit ($45,000 in 2007 and $46,000 in 2008), may want to consider a Defined Benefit plan since contributions can be substantially higher resulting in fast accumulation of retirement funds.
The plan has a specific formula for determining a fixed monthly retirement benefit. Benefits are usually based on the employee's compensation and years of service which rewards long term employees. Benefits may be integrated with Social Security which reduces the plan's benefit payments based upon the employee's Social Security benefits. The maximum benefit allowable is 100% of compensation (based on highest consecutive three-year average) to an indexed maximum annual benefit ($180,000 in 2007 and $185,000 in 2008). Defined Benefit plans may permit employees to elect to receive the benefit in a form other than monthly benefits, such as a lump sum payment.
An actuary determines yearly employer contributions based on each employee's projected retirement benefit and assumptions about investment performance, years until retirement, employee turnover and life expectancy at retirement. Employer contributions to fund the promised benefits are mandatory. Investment gains and losses decrease or increase the employer contributions. Non-vested accrued benefits forfeited by terminating employees are used to reduce employer contributions.
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.
Each employee's "account" receives an annual contribution credit, which is usually a percentage of compensation, and an interest credit based on a guaranteed rate or some recognized index like the 30 year treasury rate. This interest credit rate must be specified in the plan document. At retirement, the employee's benefit is equal to the hypothetical account balance which represents the sum of all contribution and interest credits. Although the plan is required to offer the employee the option of using the account balance to purchase an annuity benefit, employees generally will take the cash balance and roll it over into an individual retirement account (unlike many traditional Defined Benefit plans which do not offer lump sum payments at retirement).
As in a traditional Defined Benefit plan, the employer in a cash balance plan bears the investment risks and rewards. An actuary determines the contribution to be made to the plan, which is the sum of the contribution credits for all employees plus the amortization of the difference between the guaranteed interest credits and the actual investment earnings (or losses).
Employees appreciate this design because they can see their "accounts" grow but are still protected against fluctuations in the market. In addition, a cash balance plan is more portable than a traditional Defined Benefit plan since most plans permit employees to take their cash balance and roll it into an individual retirement account when they terminate employment or retire.