Types Of Plans

401(k)
The most popular plan available today. In this plan, an employee chooses an amount to contribute each pay period from his paycheck. This amount is taken out of the paycheck on a pretax basis, so the employee immediately defers taxation. The earnings on the deposits also accumulate tax deferred. An employer may also match the employees’ deferral, usually as a percentage of the amount contributed. These types of plans can also be designed under new “Safe Harbor” formulas to automatically pass discrimination requirements.

 

Cash Balance

A cash balance plan is a type of defined benefit plan that has the characteristics of a defined contribution plan. Each year a participant’s account is credited with a pay credit and an interest credit. The pay credit is dependent upon each participant’s compensation. The growth of the participant’s accounts depends on pay credits that the employer contributes. A cash balance plan offers more portability than traditional pension plans since you can take your vested account as a lump sum whenever you terminate employment.

 

Profit Sharing

This is the most flexible plan available, because an employer may choose whether or not to make a contribution each year. Up to 25% (for plan years beginning in 2002) of the total eligible compensation of the employees may be contributed. There are also several types of allocation formulas available, many of which benefit owners and/or key employees at a higher rate than the other employees, such as in “tiered” or “new comparability” formulas. Also, a profit sharing plan can add the 401(k) feature above (including the matching feature) and become a 401(k) Profit Sharing Plan

 

403(b)

This plan, available to 501(c)(3) organizations only, works just like a 401(k) plan. The employee chooses the amount to contribute each pay period from his paycheck. The amount is taken out of the paycheck on a pretax basis, so the employee immediately defers taxation. The earnings on the deposits also accumulate tax deferred. An employer may also match the employees’ deferral, usually as a percentage of the amount contributed.

 

Defined Benefit

This is a “true” pension plan. It is designed to pay a monthly benefit to employees upon retirement. The amount of the monthly benefit can be based on an employees final average compensation or years of service, or a combination of both. This type of plan is 100% funded by the employer. Although it is not as flexible as a Profit Sharing Plan, a Defined Benefit Plan can generate a much higher deductible contribution and accrue benefits at a much faster rate.