|There are Many Types of Qualified Plans to choose from:
In today’s world few employers can successfully compete in the labor marketplace without maintaining a comprehensive employee benefit program. A major component of such a program must be one or more qualified profit sharing or pension plans.
Profit Sharing Plans
These provide for deferred sharing of employer profits with employees. Contributions to the plan are usually discretionary, a feature many employers find desirable if they are not certain how much they can contribute to a plan from year to year.
These allow pre-tax employee contributions, with or without matching employer contributions. The annual individual savings deferral is limited by law to $15,500 for the calendar year 2007. This amount is increased by the government each year for cost of living adjustments.
Money Purchase Pension Plans
In a money purchase plan, the annual employer contributions are defined. The annual contribution limit for any participant is the lesser of $45,000 or 25% of the participant’s total compensation. The dollar amount is increased by the government each year for cost of living adjustments.
403(b) Annuity Plans
403(b) plans are also known as tax sheltered annuities or TSAs. This type of plan is only available to the employees of tax-exempt charitable organizations or public schools. Like 401(k) plans. TSAs can accept pre-tax contributions for employees as well as employer matching and discretionary contributions.
Defined Benefit Plans
This plan type pre-defines the dollar amount of employee’s retirement benefits. The employer has minimum funding requirements, regardless of profitability. Benefits received at retirement are currently limited to $170,000 per year. This maximum amount may increase each year for cost of living adjustments.
Employee Stock Ownership Plan
ESOPs allow employees to become stockholders in the company through employer contributions of the company’s stock.
Age-Based Profit Sharing Plans
Age-based plans display features of both defined benefit plans and profit sharing plans. The concept of age-base is that it allows the employer’s contribution to the plan to be allocated based on a combination of compensation and age. This means an individual who is closer to normal retirement age will receive a larger share of the contribution than a younger employee earning the same salary. Age-based plans are popular because they couple the discretionary contribution feature of a profit sharing plan with the ability to provide a larger contribution (as a percentage of pay) for those employees who are closest to retirement.
Some Questions to Ask...
The answer to these questions will dictate which type or types of qualified plans are best for you.
Any of these plans can be very successful with sound design, promotion, implementation, and administration. Choosing the plan that’s best for your organization depends on a thorough analysis of the following factors:
Who comprises your workforce: Are they predominantly young or old? Are they mostly primary or secondary wage earners? Is your workforce primarily married or single? How high is your employee turnover? Is it easy for you to replace good workers? Are your employees highly motivated and productive?
How much money can you afford (or do you desire) to spend on deferred compensation and retirement benefits? Consider both the funding and administration of the plan. Do you expect your budget for these programs to rise, stay the same, or decrease in the future? How much do you feel employees should contribute toward their own retirement.
How does current and pending legislation affect your current plan? Which plan makes the most sense for your organization based on legislative requirements and tax guidelines?
What do your employees expect in the way of retirement plan benefits? Have they indicated the plan features they prefer through surveys, exit interviews, or the “grapevine”?
Do you currently have qualified plans that need revision due to tax law changes or other circumstances? Are you actively seeking ways to attract additional capital funding for your company? Are you owners or other key executive involved in estate planning decisions?
- Phil Price Interview, Retirement Plan Options for Small Businesses, 2016
- Phil Price Interview, Retirement Plan Alternatives for Small Businesses, 2014
- Phil Price Interview, Qualified Retirement Plans for Closely Held Businesses, 2012
- Qualified retirement plans for small businesses 2011, Part 1 of 2
- Qualified retirement plans for small businesses 2011, Part 2 of 2