Here is general information about the most popular types of retirement programs. Our consultants can help you choose the plan that is best for you. Click below to learn more about qualified retirement plans.

A qualified plan must meet a certain set of requirements in the Internal Revenue Code such as minimum participation, vesting and funding requirements. In return, the IRS provides significant tax advantages to encourage businesses to establish retirement plans including:

In addition, sponsoring a qualified retirement plan has the following advantages:

Employers can choose between two basic types of retirement plans, defined contribution and defined benefit, which are described below. Both the defined benefit and defined contribution plan may be sponsored to maximize benefits. Our consultants can help you choose the right plan for your company.

A defined contribution plan defines the contribution the company will make to the plan and how the contribution will be allocated among the eligible employees. Separate account balances are maintained for each employee. The employee's account grows through employer contributions, investment earnings and in some cases forfeitures (amounts from the non-vested accounts of terminated participants). Some plans may also permit employees to make contributions on a before-and/or after-tax basis.

Since the contributions, investment results and forfeiture allocations vary year by year, the ultimate retirement benefit cannot be predicted. The employee's retirement, death or disability benefit is based upon the amount in his/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 terminating employees can be used to reduce employer contributions or be reallocated to active participants.

For 2002 and 2003, the maximum annual amount that may be credited to an employee's account (taking into consideration all defined contribution plans sponsored by the employer) is limited to the lesser of 100% of compensation or $40,000. The maximum for 2001 is the lesser of 25% of compensation or $35,000.

Although the percentage limit has substantially increased from 25% to 100%, there are still tax deduction limits that must be taken into consideration. For example, the maximum profit sharing deduction limit in 2002 is 25% of compensation. For an employee earning $100,000, the maximum deductible employer contribution would be $25,000 (25% x $100,000). However, the employee could also make an $11,000 401(k) contribution to the plan. As a result the total amount credited to his account for the year would be $36,000 (36% of his compensation), and he would satisfy the maximum annual limit since total contributions are less than $40,000.

The profit sharing plan is one of the most flexible qualified plans 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. Prior to 2002, the contribution limit was 15% of compensation.

The contribution is usually allocated to employees in proportion to compensation and may be integrated with Social Security which results in larger contributions for higher paid employees.

Age-weighted profit sharing plans: Profit sharing plans may also use an age-weighted allocation formula that takes into account each employee's age and compensation. This formula results in a significantly larger allocation of the contribution to employees who are closer to retirement age. Age-weighted profit sharing plans combine the flexibility of a profit sharing plan with the ability of a pension plan to skew benefits in favor of older employees.

More and more employees perceive 401(k) plans as a valuable benefit which has made them the most popular retirement plans today. Employees can benefit from a 401(k) plan even if the employer makes no contribution. Employees voluntarily elect to make pre-tax contributions through payroll deductions up to an annual maximum limit  ($11,000 in 2002, $12,000 in 2003). 

Beginning in 2002, employees aged 50 and older will be able to defer an additional $1,000 (referred to as "catch-up contributions"). The catch-up contribution amount increase after 2002 by $1,000 each year until reaching $5,000 in 2006.

Often the employer will match some portion of the amount deferred by the employee to encourage greater employee participation, i.e., 25% match on the first 4% deferred by the employee. Since a 401(k) Plan is a type of profit sharing plan, profit sharing contributions may be made in addition to or instead of matching contributions. Many employers offer employees the opportunity to take hardship withdrawals or borrow from the plan.

Employee and employer matching contributions are subject to a special non-discrimination test that limits how much the group of employees referred to as a "Highly Compensated Employees" can defer based on the amount deferred by the "Non-Highly Compensated Employees." The plan may be designed to satisfy "401(k) Safe Harbor" requirements (certain minimum employer contributions and 100% vesting of employer contributions) which can eliminate this nondiscrimination test.

An ESOP is a type of profit sharing plan that is required to invest primarily in the employer's stock. Although the rules surrounding an ESOP are somewhat unique and differ from those which apply to a regular profit sharing plan, the general principals are the same.

As the name implies, employees have some ownership in the employer. As owners, employees may be more motivated to improve corporate performance because they can benefit directly from company profitability.

A money purchase pension plan operates like a profit sharing plan. The major difference is that, unlike profit sharing plans where employers are permitted to make discretionary contributions each year, the employer has a set contribution rate which is stated in the plan document. These mandatory contributions must be made each year regardless of the employer's profits. Failure to make a contribution can result in the imposition of penalties.

Contributions are generally based on a fixed percentage of each employee's compensation. For tax deduction purposes, the company contribution cannot exceed 25% of compensation to a maximum of $40,000 per employee ($35,000 maximum for 2001). The contribution may be integrated with Social Security which results in larger contributions for higher paid employees.

Prior to the Economic Growth and Tax Relief Reconciliation Act of 2001 ("EGTRRA"), profit sharing plans were limited to 15% of compensation while money purchase plans were permitted to make contributions as high as 25%. A combination money purchase pension plan and profit sharing plan was sometimes used to limit mandatory contributions while retaining the ability to make larger contributions in good years. The new 25% profit sharing deduction limit will give employers the ability to make larger contributions to profit sharing plans and may render the money purchase pension plan obsolete.

These plans, sometimes referred to as "cross-tested plans," are profit sharing or money purchase pension plans (defined contribution 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 defined contribution non-discrimination testing. New comparability plans are generally utilized by small businesses that want to maximize contributions to owners and higher paid employees while minimizing those for all other 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 non-discrimination requirements. 

Employers who want to shelter more than the annual defined contribution limit ($40,000 in 2002 and 2003), may want to consider a defined benefit plan since contributions can be substantially higher resulting in fast accumulation of retirement funds.

The plan has a specific formula for determining a fixed monthly retirement benefit. Benefits are usually based on the employee's compensation and years of service which rewards long term employees. Benefits may be integrated with Social Security which reduces the plan's benefit payments based upon the employee's Social Security benefits. The maximum benefit allowable is 100% of compensation (based on highest consecutive three-year average) to a maximum annual benefit of $160,000 (2002 and 2003 limit). Defined benefit plans may permit employees to elect to receive the benefit in a form other than monthly benefits, such as a lump sum payment.

An actuary determines yearly employer contributions based on each employee's projected retirement benefit and assumptions about investment performance, years until retirement, employee turnover and life expectancy at retirement. Employer contributions to fund the promised benefits are mandatory. Investment gains and losses decrease or increase the employer contributions. Non-vested accrued benefits forfeited by terminating employees are used to reduce employer contributions.