-
Profit
Sharing Plans: This type of plan is a defined
contribution plan. The employer agrees to make a discretionary
contribution, which usually comes out of profits. The employee's
retirement benefits are based on the amount in their individual
account upon retirement.
-
401(k)
Profit Sharing Plan: This plan is arranged
according to Section 401(k). Covered employees can elect to
defer income. They do this by making a pretax contribution to a
profit sharing or stock bonus plan. Did you know that a
cafeteria plan may also provide a 401(k) as a qualified benefit
option? It can.
-
Money Purchase Pension Plans: These are also
defined contribution plans, but in this case the employer's
contributions are mandatory. They base the contribution on each
participating employee's compensation. Further, retirement
benefits are based on the amount in the participating employee's
individual retirement account at the time they retire.
-
Target
Benefit Plans: This plan is a cross between two
other plan types, a defined benefit plan and a money purchase
plan. The annual contribution is determined by the amount needed
each year to accumulate a fund sufficient to pay the targeted
benefit amount upon retirement. Contributions are allocated to
individual accounts for each participating employee.
-
Age-Weighted
Plans: These plans use both age and compensation
as the basis for allocating employer contributions among
participating employees.
-
Employee Stock Ownership Plans: This is often
referred to as an ESOP. It can include profit sharing, stock
bonuses or money purchase plans. These funds must be invested in
company stock primarily. The difference between an ESOP and
other plans is that an ESOP may borrow from the employer or use
the employer's credit to purchase company stock.
-
Cross Tested/New
Comparability Plans: A cross-tested plan allows
a plan sponsor to place each eligible participant into his or
her own “tier” and the plan sponsor then determines on a
year-by-year basis how much is contributed on behalf of each
individual or group of individuals. Tiers can be based on a
variety of factors, including compensation, longevity on the
job, meritorious service, attaining certain sales and/or
managerial goals, to name just a few. Using these plans, a
business can tailor its total compensation and benefit package
to meet individual needs and provide a vastly more meaningful
benefit to employees and especially to key individuals.
-
Cash Balance
Plans: A cash balance plan is a defined benefit
plan that defines the benefit in terms that are more
characteristic of a defined contribution plan. In other words, a
cash balance plan defines the promised benefit in terms of a
stated account balance rather than the amount of monthly benefit
to be received at a set age. Generally, a cash balance plan
defines benefits payable to the participants as either a
percentage of pay or a flat dollar amount or a combination of
both. It is also possible to differentiate between the different
classes of employees in the cash balance plan. Some employees
can have a higher contribution amount or percentage than others,
if required tests are satisfied. Because of the way benefits are
calculated, there is a “hypothetical account balance” that is
generated for each participant. At the end of each year, the
participant can see this hypothetical account balance.
