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Profit-sharing plans are among the most
popular employer-sponsored retirement plans. These straightforward
plans allow you, as an employer, to make a contribution that is
spread among the plan participants. You are not required to make an
annual contribution in any given year. However, contributions must
be made on a regular basis. With a profit-sharing plan, a separate
account is established for each plan participant, and contributions
are allocated to each participant based on the plan's formula (this
formula can be amended from time to time). As with all retirement
plans, the contributions must be prudently invested. Each
participant's account must also be credited with his or her share of
investment income (or loss). |
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A type of deferred compensation plan, and
now the most popular type of plan by far, the 401(k) plan allows
contributions to be funded by the participants themselves, rather
than by the employer. Employees elect to forgo a portion of their
salary and have it put in the plan instead. The requirements for
401(k) plans are complicated, and several tests must be met for the
plan to remain in force. These plans can be extremely expensive to
administer, but the employer's contribution cost is generally very
small (employers often offer to match employee deferrals as an
incentive for employees to participate). Thus, in the long run,
401(k) plans tend to be relatively inexpensive for the employer.
Note: 401(k) plans are
frequently confused with profit-sharing plans. |
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Money purchase pension plans are similar to
profit-sharing plans, but employers are required to make an annual
contribution. Participants receive their respective share according
to the plan document's formula. Like profit-sharing plans, money
purchase pension plans are relatively straightforward and
inexpensive to maintain. However, they are less popular than
profit-sharing or 401(k) plans because of the annual contribution
requirement. |
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By far the most sophisticated type of
retirement plan, a defined-benefit program sets out a formula that
defines how much each participant will receive annually after
retirement if he or she works until retirement age. This is
generally stated as a percentage of pay, and can be as much as 100
percent of final average pay at retirement.
An actuary certifies
how much will be required each year to fund the projected retirement
payments for all employees. The employer then must make the
contribution based on the actuarial determination. Unlike defined
contribution plans, there is no limit on the contribution.
Defined-benefit plans potentially offer the largest contribution
deduction and the highest retirement benefits to business owners.
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SIMPLE plans work much like 401(k) plans,
but do not have all the testing requirements. So, they're cheaper to
maintain. There are several drawbacks, however. First, all
contributions are immediately vested; meaning any money contributed
by the employer immediately belongs to the employee (employer
contributions are usually "earned" over a period of years in other
retirement plans). Second, the amount of contributions the highly
paid employees (usually the owners) can receive is severely limited
compared to other plans. Finally, the employer cannot maintain any
other retirement plans. SIMPLE plans cannot be utilized by employers
with more than 100 employees. |
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The above sections are not exhaustive, but
represent the most popular plans in use today. Recent tax law
changes have given Brecek & Young Advisors new and creative ways
to write plan formulas and combine different types of plans, in
order to make the most of your retirement. |
