DEFINED CONTRIBUTION PLANS
Defined Contribution (DC) plans are the most widely used retirement plans among small and mid-sized businesses. Unlike defined benefit plans, these do not promise a specific retirement benefit. Instead, the focus is on how much is contributed each year, typically by the employee, the employer, or both.
DC plans offer flexibility, tax advantages, and the ability for employees to take an active role in building their own retirement savings—all while providing employers with a valuable tool for recruiting and retaining talent.
401(k) PLANS
401(k) plans are salary deferral plans that allows employees to contribute a portion of their wages to a tax-deferred retirement account. Employers may choose to match a percentage of employee contributions or make additional discretionary contributions.
These plans are attractive for both employees and employers. Employees benefit from pre-tax savings and investment growth, while employers gain a valuable incentive to offer in a competitive job market. 401(k) plans can be customized in many ways, including adding profit sharing or Safe Harbor features for additional flexibility and compliance benefits.
SAFE HARBOR PLANS
Safe Harbor 401(k) plans are designed to automatically meet IRS nondiscrimination requirements by requiring employers to make specific contributions to employee accounts. These contributions must follow set formulas and are immediately vested.
The key benefit of a Safe Harbor plan is that it ensures owners and highly compensated employees can contribute the maximum allowable amount to their 401(k) accounts—without being limited by the results of annual testing. For many companies, Safe Harbor plans offer peace of mind, simplified compliance, and strong appeal to employees.
PROFIT SHARING PLANS
Profit sharing plans allow employers to make flexible, discretionary contributions to employee accounts—regardless of whether the company actually shows a profit. Contributions can vary from year to year based on the business’s financial situation, giving employers control over funding levels.
These plans are often paired with 401(k) plans to enhance retirement benefits and maximize employer contributions. With proper plan design, profit sharing allocations can be structured to benefit key employees or business owners while still satisfying IRS requirements.
