Retirement Plans

Also known as Employer Sponsored Retirement Plans and Qualified Retirement Plans. "Qualified Plan" contributions are deductible, but to "qualify" the plan for tax purposes, the plan must satisfy rules established by ERISA (and other legislation) and the Department of Labor. Rules primarily enforce Non-Discrimination (no employee classes or positions may be excluded), Participation (must be available to all eligible employees), and Contribution Limits (maximum annual contributions defined for various types of plans).

Defined Contribution Plans

401 (k)

Deferred Compensation arrangements exceed limits of Qualified Retirement Plans

A 401(k) plan, named after the related Internal Revenue Code, is a contributory plan. That means the employee determines their contribution level up to an annual maximum of $23,000 for 2024 plus another $7,500 for "make-up" contributions for those age 50 or older. Contributions are generally made by payroll deduction and are pre-tax, also referred to as salary reductions. It is common for employers to match employee salary deferrals up to a certain percentage of salary, such as 3%. In addition, some plans add a Profit-Sharing feature with total annual contributions as high as $69,000.

Profit-Sharing

Just like the name sounds, an employer can incentivize plan contributions by tying them to employee performance measured by the profitability of the company. Profit-Sharing plan design allows some flexibility to the employer to determine whether they can afford to make a plan contribution in any given year. This design is especially attractive to smaller or newly established companies that have less predictable cash flow or are in cyclical industries. Employers can skip making contributions in down cycles or unprofitable years and make maximum contributions in profitable years.

403(b)

403(b) plans share similarities with 401 (k) plans in that they are contributory and can have employer match contributions, but they are exclusive to non-profit organizations, including school districts, colleges, libraries, symphonies, churches, and large institutions such as the American Red Cross, MS Society, etc.

Defined Benefit Pension Plans

Defined Benefit Plans, as stated, determine the annual contribution necessary to fund the participant's annual benefit at retirement. Contributions are actuarially determined and are mandatory. This design favors older highly compensated employees (typically owner employees) because the contributions necessary to fund their benefit can be hundreds of thousands of dollars annually. These plans are most appropriate for successful closely held companies with consistently high cash flows and owners who are closer to retirement age who desire to defer more personal income and minimize income taxes. They are also well suited for profitable companies that seek to reward and retain their highly compensated executive and professional employees with rich benefits. Plan sponsors pay a premium to the PBGC (Pension Benefit Guarantee Corporation), an agency of the U.S. government, to insure that promised plan benefits will be paid to plan participants.