Types Of Employer-sponsored Retirement Plans

Posted by Katie Kole

October 22, 2009

Many of the employers offer attractive retirement packages to the employees today. If you are offered one, make sure you get into it after considering your circumstances and the plan put forth by the employer. Some of the more popular plans are mentioned below:

401(k) Under the 401(k), the employees are given an opportunity to defer taxes on a part of their income by making contributions to the retirement fund. 401(k), 403(b) and 457 are the various plans that are similar to these sections under the Internal Revenue Code. 403(b) plans are similar to the 401(k) are applicable to the tax-exempt organizations, whereas 457 is a plan meant for governmental agencies. Employers that present the employees with 401(k) or 403(b) plans may offer them with a Roth version.

An employee aged fifty or above is given the option to make catch-up contributions under the plan. Moreover, the legal annual contribution ceiling for these plans is considerably higher than those for IRAs. Under special circumstances the employers add an amount equal to the contributions made by the employees, offering better income.

The 401(k), 403(b) and 457 plans are expected to abide to the minimum distribution rules similar to the ones applicable with the IRA. The difference between the two is under certain situations, you may make contributions after you turn 701/2.

Solo 401(k) plan The traditional 401(k) plan is not accessible by self-employed individuals. To overcome this, a new plan was developed that takes the features of 401(k) along with other plans forming solo 401(k) that permits them the satisfaction of planning for retirement.

Under the plan, the individual can contribute an amount equal to the 401(k) limit along with the catch-up amount, if any, besides an amount to a SEP IRA. However, as the plan is meant for the self-employed people who do not have employees under them, having people under you call for the adoption of the traditional 401(k) plan or others. The self-employed individual have also to ensure the supply of an amount essential to make the contribution, or else the operational and other cost of creating the plan will be lost. But in spite of the disadvantages, the plan is worth considering.

SIMPLE IRA: The plan, SIMPLE (Savings Incentive Match Plans for Employees) IRA is a program meant for employers with less than hundred employees. Under the plan the employer has to contribute an amount equal to those made by the employees up to a certain percentage limit, typically, 3%, or a flat rate of 2% irrespective of the contribution made by the employee.

The requirements imposed by the law on the contribution ceiling and the catch-up amount are lower than for 401(k) plans. Though the SIMPLE IRA rules and SIMPLE 401(k) plan rules are similar, the minor differences make the SIMPLE IRA preferable. For example, while limited testing is necessary for SIMPLE 401(k), discrimination testing is not called for in SIMPLE IRAs.

Defined contribution plans: These plans that include the profit sharing and money purchase plans have different rules regarding the limits to the employer and employee contribution. Where the employer plans are merged with the employee plans, the annual contribution ceiling by the employee excluding the catch-up amount is made lower that what the employer can offer.

An ESOP is a variety of defined contribution plan suited for closely-held businesses.

Defined benefit plan: Though not popular these days, under this traditional method the employees are prevented from making contributions to the retirement fund. The whole investment risk is borne by the employer who assures to pay the annual retirement benefit to the employee. While the defined benefit plan funds are often pooled, the defined contribution plan funds are segregated by employees.

A well-structured defined benefit plan is expensive to be established, but allows the business entities to make a significant contribution to the fund than the established defined contribution maximum. The cost is on account of the fact that the fund is driven by the amount required to produce the benefit expected. Though it is vital to know the returns that can be expected in the future, it is even more critical to recognize the factors that influence your retirement benefits. Remaining knowledgeable about the decision is necessary to identify a retirement plan that can reap maximum benefit.

This data is distributed for informational purposes only, with the understanding that Doeren Mayhew is not rendering legal, accounting, or other professional advice or opinions and assumes no liability in connection with its use. Please contact Doeren Mayhew for more information.

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Types Of Employer-sponsored Retirement Plans

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