Qualified Retirement Plans
2 Basic Types of Plans
Defined Benefit Plan
- Defined Benefit Plan - a company retirement plan in which a retired employee receives a specific amount based on salary history and years of service, and in which the employer bears the investment risk. Contributions may be made by the employee, employer, or both.
- Defined Contribution Plan - a company retirement plan, such as a 401k or 403b, in which the employee elects to defer some amount of his/her salary into the plan and bears the investment risk.
A defined benefit plan promises the participant a specific monthly benefit at retirement and may state this as an exact dollar amount. Monthly benefits could also be calculated through a formula that considers a participant's salary and service.Defined Contribution Plan
Plan provides and individual account for each participant. The benefits are also affected by income, expenses, gains and losses. The annual contributions in a defined contribution plan cannot exceed the smaller of $40,000 or 100% of the participant's compensation. Some examples of defined contribution plans are:
Last Updated: 9/23/2012 10:05:00 PM
- Stock Bonus Plan - a profit sharing plan that delivers benefits to employees in the form of stock instead of cash.
- Money Purchase Pension Plan - plan in which the amount of contributions each employee receives from the employer is in proportion to that employee's wages. Unlike profit sharing plans, these contributions are mandatory every year, regardless of profits.
- Profit Sharing Plan - an arrangement in which an employer shares some of its profits with its employees. The compensation can be stocks, bonds, or cash, and can be immediate or deferred until retirement. Contributions are determined by a formula to allocate the overall contribution and distribution of accumulated funds after the retirement age. Unless the plans are defined as an elective deferral plan, the contributions are not tax deductible. Contributions and earnings can grow tax-deferred until withdrawn.
- Employee Stock Ownership Plan (ESOP) - a trust established by a corporation which acts as a defined contribution plan by making the corporation's employees partial owners. Contributions are made by the sponsoring employer. Contributions must be invested in the company's stock. The benefits for the company include increased cash flow, tax savings, and increased productivity from highly motivated workers. The main benefit for the employees is the ability to share in the company's success. Also called stock purchase plan.
- 401k Plan - offered by a corporation to its employees, which allows employees to contribute pre-tax dollars. In some cases, employers will match their contributions dollar-for-dollar.
- SEP (Simplified Employee Plan) - progam for self-employed people or owners of companies with less than 25 employees. This plan allows employers to contribute on behalf of eligible employees, and all contributions are tax-deductible as a business expense and can be integrated with Social Security contributions.
- SIMPLE (Savings Incentive Match Plan for Employees) - sponsored by companies with fewer than 100 employees. A SIMPLE plan may be structured as either a 401k or an IRA.