Types of Retirement Plans

This brochure provides a general overview of tax qualified retirement plans. Those most often used are:

What are the Benefits of A Retirement Plan?

Tax Savings. The employer makes contributions to a retirement plan and receives a 100% tax deduction for the contribution that is made. The contribution is then allocated to accounts of employees participating in the plan or becomes part of a fund from which benefits are paid. The contribution, and any accumulated income, is not currently taxable to the employees until received as a distribution from the plan.

Reward Employees. A plan is a tax-deferred savings vehicle for employees and can be drafted to reward employees for longer services with the company.

Owner Savings. An owner/employer may be able to save considerable amounts in a plan on a tax-deferred basis.

To take advantage of these benefits, these retirement plans must meet a number of requirements of the Internal Revenue Code and ERISA (the federal pension law).


Profit Sharing

A profit sharing plan allows an employer to make discretionary contributions to the plan which can vary from year to year, so that the contributions are affordable. Each employee covered by the plan has a separate account within the plan to accept a portion of the contribution.

401(k)

A 401(k) plan is a type of profit sharing plan that allows employees to contribute a portion of their compensation to the plan on a pre-tax basis. This pre-tax savings plan is similar to an IRA, but with much more flexibility.

Pension

A pension plan is similar to a profit sharing plan, except that contributions are not discretionary, but are required each year. Typically, this contribution is stated as a specified percentage of an employee's compensation.

Defined Benefit

A defined benefit plan provides systematically for the payment of benefits to employees over a period of years, usually for life after retirement. The benefits are usually based on such facts as years of service and compensation received by the employee. The employer must annually contribute amounts to the plan to meet these promised benefits.

SEP (Simplified Employee Pension)

A SEP is a plan under which contributions are deposited to an IRA set up for each employee. These plans have few reporting requirements, but do not offer as much flexibility, as other forms of retirement plans. The employer contributions can be discretionary.

SIMPLE (IRA or 401(k))

A SIMPLE plan is a simplified (but inflexible) 401(k) type plan for employees with fewer than 100 employees.

ESOP (Employee Stock Ownership Plan)

An ESOP is a highly specialized plan that invests primarily in stock of the employer and through which employees begin to own part or all of the employer. The plan can borrow the funds to purchase the stock, or can make contributions in stock. In some instances owners can sell their stock to an ESOP and reinvest in other securities without paying tax on the gain.


General Aspects Of A Retirement Plan

Various features can be used within a plan to suit a specific employer situation. For instance:

A fixed contribution to a pension plan can be based on total compensation, or on compensation excluding bonuses or commissions. Somewhat larger contributions can be made to employees who make above a certain dollar figure.

Employees covered under a plan can gradually "vest" under the terms of most plans (this is not true for a SEP or a SIMPLE), meaning that an employee who receives an allocation of money under the plan and leaves the employer after say 4 years may receive only 40% of the money put aside in the plan for this employee. The remaining 60% is eventually redistributed to the other covered employees for their benefit.

Certain classes of employees do not have to be covered under plan. However, there are detailed rules concerning governing these matters.

These are only a few of the alternatives that can be incorporated into a plan. Many more variations and other alternatives exist.


Should I Establish A Retirement Plan?

Whether to establish a tax qualified retirement plan depends on the employer's objectives, work force make-up and available funds. Tax-qualified retirement plans are one of the most significant available tax-deferred savings vehicles. An informed discussion with a competent advisor on this subject is required because various alternatives available in any qualified retirement plan (aside from a SEP or a SIMPLE) need to be carefully and deliberately structured to meet the employer's specific needs.


What Should You Do Next?

Contact one of our attorneys for additional information on Retirement Plans.