A defined contribution plan is a type of qualified retirement plan. Under this plan, an account is created for each individual employee. The employee’s account grows through employer contributions, investment earnings and, in some cases, forfeitures. Some plans may also permit employees to make contributions on a before and/or after-tax basis.
Unlike a defined benefit plan, the future retirement benefit cannot be predicted in a defined contribution plan because contribution amounts, investment results, and forfeiture allocations change yearly. The employee’s retirement, death or disability benefit is based on the amount in his or her account at the time the distribution is payable.
Employer account balances may be subject to a vesting schedule. Non-vested account balances forfeited by former employees can be used to reduce employer contributions or be reallocated to active participants. For example, if an employee leaves before his funds are fully vested, the amount that was originally contributed to that employee’s account by the employer could then be put back into a pool of funds and redistributed to existing employees.
Here is general information about the most popular types of retirement programs that TriStar works with. Our consultants will help you choose and customize the plan that is best for you. Learn more about defined contribution retirement plans below:
Profit Sharing Plans
The profit sharing plan is generally the most flexible qualified plan that is available. Company contributions to a profit sharing plan are usually made on a discretionary basis. Each year the employer decides the amount, if any, to be contributed to the plan. For tax deduction purposes, the company contribution cannot exceed 25% of the total compensation of all eligible employees. The maximum eligible compensation that can be considered for any single employee can be found in the Plan Limits.
A profit sharing plan is one that allows for an employer to make contributions to all participants on a uniform basis. Contributions in this type of plan are made solely by the employer. With a traditional profit sharing plan, the employer has the flexibility to contribute and deduct 0 to 25% of the eligible participant’s gross income. These contributions are discretionary meaning the employer can choose when and how much to contribute and they don’t depend on the profits of the company itself. A traditional profit sharing plan can be offered on its own or in addition to other plans like a 401(k).
Plans that can be offered in addition to a profit sharing plan:
401(k) plans are one of the most popular retirement plans today. Employees can voluntarily make pre-tax contributions to their 401(k) accounts. These deposits are made through automated payroll deductions, which make saving for retirement easy. Often, employers will make a matching contribution to the employees 401(k) account i.e., 25% match on the first 4% deferred by the employee. Even if an employer doesn’t offer a matching contribution, employees can still benefit from having a 401(k) plan.
A 401(k) plan is very flexible and can be customized to allow for:
• Eligible employees to make contributions to the plan
• Eligible employees age 50+ to make additional “catch-up contributions” (additional $5,500 in 2014)
• Profit sharing contributions to be made in addition to or instead of matching contributions
• Eligible Employees to take hardship withdrawals or loans from the plan
Customize your 401(k) Plan features:
• Avoid discrimination testing with a Safe Harbor 401(k) *See Below
• Include Qualified Automatic Contribution Enrollment Arrangement and/or Auto Escalation
• Allow for Roth (after tax) deferrals
• Design the plan’s eligibility and vesting requirements
Safe Harbor 401(k) Plans:
401(k) plans require annual testing known as ADP and ACP. These tests are performed to determine if highly compensated employees and owners are contributing too much in comparison to other employees. This testing can put a cap on deferral amounts for the highly compensated employees. 401(k) Safe Harbor Plans give the highly compensated employees and owners the opportunity to contribute the maximum salary deferral limit, despite what the other employees contribute.
New Comparability Plans (Cross-Tested Plans):
New comparability plans, sometimes referred to as “cross-tested plans,” are usually profit sharing plans that are tested for nondiscrimination as though they were defined benefit plans. By doing so, certain employees may receive much higher allocations than would be permitted by standard nondiscrimination testing. New comparability plans are generally utilized by small businesses who want to maximize contributions to owners and higher paid employees while minimizing those for all other eligible employees.
Employees are separated into two or more identifiable groups such as owners and non-owners. Each group may receive a different contribution percentage. For example, a higher contribution may be given to the owner group than the non-owner group, as long as the plan satisfies the nondiscrimination requirements.
SIMPLE 401(k) Plans:
This type of plan is a subset of the 401(k) plan. Employers with less than 100 participants are eligible to sponsor a SIMPLE 401(k) plan. Unlike the 401(k) plan, a SIMPLE 401(k) requires the employer to make up to a 3% matching contribution of each employee’s pay or a 2% non-elective contribution of each eligible employee’s pay. In this type of plan, employees are immediately 100% vested in all contributions.
A 403(b) is a type of plan that is similar to a 401(k) however it is only offered to certain entities. These entities include; non-profit organizations who file under IRC Section 501(c)(3) (i.e. churches, hospitals, foundations, and public educational organizations) are eligible to establish a 403(b) plan. Salary deferrals are not subject to ADP testing and certain plans may not be subject to ERISA.