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• Plan Document Preparation & Maintenance
• Administration & Plan Compliance
• Benefits of a Qualified Plan
• Types of Qualified Retirement Plans

Types of Qualified Retirement Plans

There are many different types of qualified retirement plans, and finding the right plan for your organization and goals is the first step. In fact, the right retirement plan for you may not be one of those listed below. Rather, a more simplified approach may be warranted. You’ll find more information on those types of plans, as well as those listed above at http://www.irs.gov/pub/irs-pdf/p560.pdf.

• Profit Sharing Plan: A profit sharing plan is a retirement plan to which an employer makes contributions on behalf of all of the eligible employees. The contribution amounts are discretionary. The employer decides each year 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. The company contributions can be subject to a vesting schedule that provides that an employee’s right to the contribution becomes nonforfeitable only after a period of time.
• 401(k) Plan: A 401(k) plan is a type of profit sharing plan that allows eligible employees (i.e. employees eligible to participate in the plan) to make pre-tax elective deferrals through payroll deductions. In addition, employers have the option of making contributions on behalf of all participants, making matching contributions based on employees’ elective deferrals, or both. Like a traditional profit sharing plan, these employer contributions can be subject to a vesting schedule. Rules relating to traditional 401(k) plans require that contributions made under the plan meet specific nondiscrimination requirements. In order to ensure that the plan satisfied these requirements, the employer must perform annual tests, known as the Average Deferral Percentage (ADP) and Average Contribution Percentage (ACP) tests, to verify that deferred wages and employer matching contributions do not discriminate in favor of highly compensated employees.
• Money Purchase Plan: A money purchase plan operates a lot like a profit sharing plan. The major difference is, 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 contributions are mandatory and must be made each year regardless of the employer’s profit. Failure to make the contribution can result in penalties. With the passage of EGTRRA in 2001, the advantages of maintaining a money purchase plan have largely disappeared.
• Defined Benefit Plan: In a defined benefit plan, the plan defines the benefit that will be paid at retirement age (or earlier separation from employment). An actuary determines the amount that must be deposited into the plan on an annual basis to provide the benefit called for under the terms of the plan. In addition to the benefits to be paid, the actuary takes into account an expected rate of return and other factors (e.g., mortality) when determining the required contribution each year. The actual investment results serve to cause the required contribution to increase or decrease from year to year based on whether or not they exceed the actuary’s projected returns. The investment results do not alter the benefit the employee receives, as the benefit the employee receives is determined soley by the benefit stated in the plan document. Because the employer is liable for providing that benefit, regardless of investment earnings, all investment risk is borne solely by the employer.
  Traditional Defined Benefit Plan: As a general rule, traditional DB plans will have a uniform retirement benefit formula that applies to all participants. A participant will receive a retirement benefit defined as some percentage of pay or some flat dollar amount.
  Cash Balance Plan In a cash balance plan a “theoretical” account balance (or “TAB”) is maintained on behalf of each participant. On an annual basis the TAB is credited with a “compensation credit” and an “interest credit.” The compensation credit can be a flat dollar amount or a percentage of pay and can vary by employee. The interest credit is determined by the plan document, and normally will be based on a conservative index, such as the rate on 30-year U.S. Treasury Securities.
• Combination Plan: With the repeal of the 415(e) rules for plan years beginning after December 31 1999, many employers find that by sponsoring a defined benefit (traditional or cash balance) and a profit sharing or 401(k) plan, they can provide additional retirement benefits for selected employees. By leveraging the benefits provided to employees in the profit sharing plan, the employer can sometimes provide additional valuable benefits to key employees in the defined benefit plan, sometimes amounting to hundreds of thousands of dollars.