Plans that are "blessed" by the IRS
are called qualified plans and are eligible for favorable
tax treatment. That means contributions are tax-deductible,
employees may contribute using pre-tax monies (when allowed
by the plan), and earnings on investments accumulate tax-free
until withdrawn at retirement or as a result of termination
of employment, disability or death.
qualified plans can also be "integrated" with Social Security.
This basically means that plan benefits or contributions can
be offset by benefits that the participant will receive from
Social Security. This allows a somewhat larger benefit for
more highly paid employees.
plans can also be custom designed to reflect the specific
demographic make-up of your company. For example, if one or
more of the owners of the company is 10 years older than most
of the employees, the resulting benefits for that owner can
be truly amazing. Alternatively, groups of employees
can be classified by their position or other "like characteristic",
and allocations can be made available to various groups at
different qualifying levels. For more information, contact
Pension Investors Corp.
following links lead to a brief description of some of the
more popular qualified plans:
Cash Balance Plan
A Profit Sharing Plan is the most flexible
type of plan with respect to the amount of contribution made
each year. Contributions are generally discretionary from
year to year, but the company must implement the plan with
the objective of making"substantial and recurring" deposits.
In years when the company may not be as fiscally able to make
a contribution as in other years, it may elect to either forgo
or substantially limit the amount of contribution to be made
for that particular year. The basic premise is that the plan
may choose to share company profits with the employees. The
plan must define the formula for allocating contributions
to employees, and the allocations must satisfy IRS non-discrimination
rules. However, not all employees must be treated alike.
Some of the methods used to allocate contributions are; age-weighted,
tiered, points, super-integrated, new comparability, cross-tested,
permitted disparity (a.k.a. integrated) and pro-rata. The
maximum deductible contribution that may be made by the company
for any one year is 25% of eligible compensation. However,
some participants may receive a contribution allocation greater
than 25% of their compensation due to the allocation formula.
The maximum contribution for a given participant in any given
year cannot exceed the lesser of $56,000 (2019 limit; $55,000 for 2018) or 100%
of the participant's compensation.
Currently, 401(k) plans are the most
popular type of plan with both employees and employers. These
plans allow for pre-tax employee contributions, with or without
matching employer contributions. Employee contributions ("deferrals")
are limited by law to a specific annual amount. In
2019, the maximum deferral amount is limited to $19,000, or
$25,000 for those age 50 or older. This amount is indexed
and may be increased from time to time. The sum of all employee
and employer contributions for a given participant in any
given year cannot exceed (for 2019) the lesser of $56,000 or $62,000
for those age 50 or older (as indexed) or 100% of the participant's
compensation (For 2018 the amounts were $55,000 and $61,000 respectively).
Purchase Pension Plan:
Contributions to a Money Purchase Pension
Plan are mandatory and usually based on a percentage of each
participant's compensation. Many of the same contribution
allocation methods that can be used in a Profit Sharing Plan
may be used in this type of plan. However, the mandatory obligation
to make a contribution makes this plan different from a Profit
Sharing Plan. If the company fails to make the required contribution,
a penalty tax could be imposed. The maximum deductible contribution
that may be made by the company for any one year is 25% of
eligible compensation. The maximum contribution for a given
participant in any given year cannot exceed the lesser of
$56,000 (2019 limit; $55,000 for 2018) or 100% of the participant's compensation.
Stock Ownership Plan ("ESOP"):
ESOPs allow employees to become stockholders
in the company and shareholders to have a ready market in
which to sell their stock. Most importantly, it can become
part of an "exit" strategy for the owner of a closely held
corporation. Employee Stock Ownership Plans provide benefits
similar to those of profit sharing plans, including that the
contributions by the employer are also not necessarily dependent
on profits. Although contributions to these plans must primarily
be made in shares of company stock, they can also be made
Benefit Pension Plan:
A Target Benefit Pension Plan is a cross
between a Defined Benefit Pension Plan and a Money Purchase
Pension Plan. A "target" benefit is established similar to
that of a Defined Benefit Pension Plan. Contributions are
then actuarially determined based upon an amount needed to
pay for this benefit at the participant's retirement age.
However, in no event can a participant receive a contribution
greater than could be received in a Money Purchase Pension
Benefit Pension Plan:
This type of plan provides an employee
with a pre-defined monthly benefit beginning at Normal Retirement
Age. As a specific benefit promise is made, the employer
is permitted to deduct whatever amounts are required, assuming
reasonable actuarial assumptions and cost methods. These plans
require the certification of an enrolled actuary and may require
additional government reporting.
Cash Balance Plan:
This type of plan is a defined benefit plan, but exhibits the characteristics of both a defined benefit Plan and a defined contribution plan. The plan establishes a separate account for each participant. Each year a participant receives a contribution, typically computed as a flat percentage of the employee's compensation, such as 5% or 10%. In addition, the account balance grows based on a pre-determined interest rate. The employer contribution is determined actuarially, assuming reasonable actuarial assumptions and cost methods. These plans require the certification of an enrolled actuary and may require additional government reporting.