Overview of Qualified Plans

Defined Benefit Plan

A defined benefit plan is always a pension plan. This type of retirement plan is structured to provide a participating employee with a specific benefit amount upon attaining the normal retirement age specified in the plan. An employee's future benefits are determined by means of a formula. The employer is guaranteeing certain benefits.  Fluctuations in the stock market have no bearing on the participant's balance at retirement.  Click on Defined Benefit Plans for more information.

 

Cash Balance Pension Plan

A hybrid defined benefit plan that has some of the features of a defined contribution plan. The most distinguishing feature of a cash balance pension plan is its use of a separate account for each participant. The plan sponsor is responsible for investment decisions. Investment risk (market fluctuation) is borne by the plan sponsor not the participant.


Defined Contribution Plans

General

A defined contribution plan defines the contribution the company will make to the plan.  Contributions are usually based on a percentage of eligible employees' compensation.  The minimum and maximum employer contributions vary by type of plan.

Separate account balances are maintained for each eligible employee.  The employee's account grows through employer contributions, investment earnings and in some cases forfeitures (amounts from the nonvested accounts of terminated participants that may be reallocated to the remaining participants).  Some plans may also permit employees to make contributions on a before-and/or after-tax basis.

The participant's retirement, death or disability benefit is based upon the amount in his account at the time the distribution is payable.

The maximum annual addition to an employee's account (taking into consideration all defined contribution plans sponsored by the employer) is subject to limitations.  Compensation that may be considered for plan purposes is also capped.  These maximums are adjusted for cost of living increases annually.  (See "Annual Limits" for current limits.)  Click on Defined Contribution Plans for more information.


Profit-Sharing Plan

An employer providing this type of plan will allow its employees to participate in the employer's profits. Contributions to the plan are made by the employer utilizing a predetermined formula.  Click on Profit Sharing Plans for additional information.


401(k) Plan

A 401(k) plan, also referred to as a "cash or deferred arrangement" (CODA) or "salary reduction plan", is an arrangement under which an eligible employee may elect to have a portion of his or her salary withheld from the paycheck and deposited directly into the company's retirement plan. Generally, deferred amounts are not considered to be employee contributions and are not includable in the employee's gross income or wages for federal and state withholding purposes.  The employer may, but is not required to, make contributions to the plan.  (See "Annual Limits" for current limits.)  Participants age 50 and older are eligible to make "catch up" contributions to their plan.  (See "Catch Up Contributions" for current limits.) Click on 401k Plans for additional information.


Stock Bonus Plans

This type of plan provides benefits similar to those of a profit-sharing plan except that the employer's contributions are not necessarily dependent on profits, and benefits are distributable in the form of the employer's stock. A stock bonus plan is always a defined contribution plan.  Please refer to ESOP's for detailed information.


Money Purchase Pension Plan

A money purchase plan (a defined contribution pension plan) is a retirement plan other than a profit-sharing or a stock bonus plan, that provides for fixed or determinable contributions by the employer and individual accounts for each participant.


Simplified Employee Pension (SEP)
(after Technical Corrections)

A SEP basically provides employer-sponsored Individual Retirement Accounts (IRAs).  The employer makes discretionary contributions (from 0% to 25% of the employee's compensation) by contributing to IRAs established for plan participants and owned by the participants.  For additional information, and examples, relating to SEP plans, please click here.

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