A qualified retirement plan provides numerous benefits, including future financial stability, tax deferrals, and talent retention.
The plans we cover below are all types of qualified plans.
Defined contribution (DC) plans are characterized by contributions made to the plan each year, either by the employer or the employer and the employee.
This plan gives eligible employees the right to elect to make contributions, which are generally made through payroll deductions. The employer can elect to make matching contributions, as well. In most 401(k) plans, a diverse choice of investments is provided for employees.
Automatic Enrollment 401(k) Plans
Employees are automatically enrolled in this plan and contribute a designated percentage of their pay. Because these plans require an election not to participate, they boast much higher rates of participation. Thus, nondiscrimination testing is easier to pass, but administration and employer costs are higher for matching contributions.
Safe Harbor 401(k) Plans
Safe harbor plans are exempt from nondiscrimination testing in exchange for a certain level of fully vested contributions to rank-and-file employees from the employer. This contribution is either a minimum percentage of pay for all eligible employees or a required rate of matching.
In a profit sharing plan, the employer can decide to make contributions on a year-by-year basis. There is generally no minimum amount required. Each contribution is flexible based on the profit of the business that year. These plans are often used in conjunction with 401(k) plans and are subject to IRS limits.
In new comparability plans, eligible employees are placed into different contribution tiers, so allocations are no longer a uniform percentage of employee compensation. This enables the employer to design the plan to favor certain groups of employees by providing greater contributions to that tier. IRS regulations require that these allocations be tested each year to meet nondiscrimination requirements.
Defined benefit (DB) plans are characterized by the benefit paid out at retirement for participants. The employer is the sole funder for the plan and contributes each year to meet the ultimate benefit goal.
Traditional Defined Benefit Plans
In these plans, the IRS often permit a range of employer contributions. This allows the employer to fund higher amounts in good times and reduce funding during leaner times.
These plans work well when the employer is looking for tax deductible contributions that exceed the limits of a defined contribution plan, as they are only limited to the amount of retirement benefit the employer can fund. In many situations, the tax-deductible contributions could be $150,000 or higher.
Cash Balance Plans
Often referred to as a “hybrid” plan, cash balance plans are DB plans that act like DC plans. Employees do not make contributions; the employer makes an annual contribution on behalf of employees. One main benefit of a cash balance plan is that the employer can save much more for retirement than with a 401(k) plan alone. The contributions for an employee can also be much higher than allowed in a profit sharing plan.
All the plans described above are subject to complex IRS and DOL requirements. Our team at EGPS is here to help. We help clients gain the considerable benefits and tax advantages provided by these plans and avoid regulatory pitfalls.
We’ll navigate the maze of available options, without crushing you under details.