Qualified Plans

There are many defined contribution plan options, but they generally fall into three distinct categories - profit sharing plans being one of them. One well known profit sharing plan type is the 401(k).

The General Advantages of Profit Sharing Plans:

• Allows you to change the plan contribution each year or even decide not to make a contribution in certain years.
• You can establish eligibility requirements that employees must meet to receive a contribution.
• Can be designed to favor select employees, including you.

Within the Profit Sharing category there are a number of design options. Which profit sharing plan is best for your business?

• Traditional Profit Sharing - Everyone receives the same percentage of pay as a contribution. This plan is appropriate if only owners of the business are eligible to participate.
• Integrated Profit Sharing - Those employees earning over the Social Security wage base receive a higher percentage of the plan contribution than those earning under the Social Security wage base. This plan is appropriate if you are younger than most of your employees but earn a higher salary.
• Age-Weighted Profit Sharing - The majority of the contribution goes to those older employees who are closer to retirement. This plan is appropriate if you are older than your employees or if you want to favor older, long-time employees.
• Cross-Tested Profit Sharing - Allows you to place employees in different 'groupings' allowing you to allocate a higher amount of the contribution to yourself and a lower amount to employees. This plan is appropriate if you are five to ten years older than the average age of your employees.

No matter which plan type is right for you, your contributions to a profit sharing plan are always an opportunity, not an obligation. You have the flexibility to choose how much to contribute each year (within the limits placed on these plans by the tax code).

The advantages of 401(k) plans:

• Allow employees to save money for their retirement.
• Employee salary deferrals may be made pre-tax, post-tax, or a combination of both.
• Employees have flexibility in how much they contribute up to certain limits.
• Employers may choose to match some of the employees' contributions.

Within the category of 401(k) plans, there are a number of plan options. Which 401(k) plan is best for your business?

• Traditional 401(k) - does not require you to make a matching contribution, but it could limit how much you can defer.
• Safe Harbor 401(k) - does require you to make a matching or non-elective contribution, but it will enable you to defer the maximum allowed by law. With auto enrollment, employees are automatically enrolled and must elect not to participate if they do not want to defer. Auto enrollment can help increase the participation in the plan.
• Solo 401(k) - available for businesses that do not have eligible employees. This plan allows the business owner, and key/highly compensated employees, to make elective salary deferrals as well as employer profit sharing contributions. These plans can also be combined with a Defined Benefit plan to get the maximum tax-deductible contribution allowed by law.

The advantage of Defined Benefit plans:

• Allows for substantially larger, tax deductible contributions
• Retirement benefit is known in advance

Which Defined Benefit plan is best for your business?

• Traditionally Funded Defined Benefit Plans - this type of plan engages an actuary who, based on certain assumptions, determines how much money must be contributed to plan a fund the determined pension benefit. Plan formulas can be as simple as everyone received the same percentage of pay benefit of they can be designed to favor older employees or select groups of employees.
• 412(e)(3) Fully Insured Defined Benefit Plan - with this type of plan, instead of engaging an actuary to determine the cost to fund benefits, the cost is determined based on the guaranteed^* values of an annuity and/or life insurance policy that must be used to fund the plan. This type of plan will generate a higher tax deductible contribution than a Traditional Defined Benefit plan. Because the plan formula for this type of plan is a percentage of pay benefit, the plan is not ideal for employers who have a number of employees who are the same age or same age or older than the owners.