There
are many different types of retirement plans. Any entity, incorporated
or not, with just one employee or 100,000, can sponsor a retirement
plan. The advantages of offering a plan include attracting employees,
enhanced employee loyalty, deductible corporate contributions, possible
tax deferral of salary and the ability to set aside funds for retirement
on a tax-advantaged basis. The type of plan a company implements
depends on the goals, profitability, and demographics of the company.
Given a company's employee census, we can develop multiple proposals
showing the advantages and differences between each type of plan.
To start a retirement plan, the company must adopt
a plan document then administer the plan within rules set forth
by the Internal Revenue Service and Department of Labor. As a third
party administrator Spectra can assist you designing your plan as
well as ongoing annual administration of the plan.
Listed
below are the some of main types of plans and a brief description
of each.
Defined
Benefit Plan
Under
this type of plan, the company promises to pay a lifetime monthly
benefit to all eligible participants starting from the time they
reach retirement age. This type of plan is commonly known as a
pension plan. The contribution required each year must be calculated
and certified by an enrolled actuary. The main advantage of a
defined benefit plan over other types of plans is that the annual
deductible contribution can be much higher and be more advantageous
to the principals of the company.
Defined
Contribution Plan
In
a defined contribution plan, each participant maintains an account
balance. The account balance reflects company contributions, possible
contributions from the participant, gains or losses from the investments
in the trust, and possible withdrawals. Unlike defined benefit
plans, there is no promise of receiving a lifetime monthly benefit
at retirement age. The value of their account at retirement age
is the benefit. The advantage of a defined contribution plan is
greater flexibility of annual contributions.
There
are many types of defined contribution plans, some of which are
described below.
Profit
Sharing Plan
There
is great flexibility in a profit sharing plan. The company generally
can decide after the close of the year what contribution, if any,
it will make to the plan. There are numerous formulas that can
be used to allocate the contribution to the eligible employees.
Some are simply based on the salary of each eligible participant.
Others are more complex involving both the salary and age of each
participant. Plans with formulas involving participant ages are
sometimes called "age-weighted" or "new comparability"
plans.
401(k)
Profit Sharing Plan
A
401(k) profit sharing plan has everything that a regular profit
sharing plan has with an additional element. Each eligible participant
can opt to defer part of his or her salary directly into the plan.
This deferral is not subject to federal income tax. As it is still
a profit sharing plan, the company has the option to make contributions
to all eligible participants over and above the deferrals. Also,
the company has the option to make matching contributions, for
those participants who opt to defer part of their salary.
The following two plans have characteristics similar to defined
contribution plans as well as Individual Retirement Accounts (IRAs)
Simplified
Employee Pension (SEP)
A
SEP is similar to a profit sharing plan. However the eligibility
rules and allocation formulas allowed are limited. In addition
vesting of company contributions must be 100% immediate.
Simple IRA
A
Simple IRA is similar to a 401(k) plan with smaller contribution
limits. Unlike a 401(k) the company must make a contribution using
one of two allowable formulas. As with a SEP vesting of company
contributions must be 100% immediate.
Please contact
us for more information specific to your company's needs.
1016 Mill Creek Drive, Feasterville, PA 19053
- 215-953-1520 - fax -215-953-8650
