Qualified Retirement Plans
| Qualified Retirement Plans Comparison Chart |
Many business owners today recognize that in order to retain quality employees, reduce turnover, and contribute to good morale, their company must provide a qualified retirement plan .Eligible contributions are deductible expenses to your business and all contributions grow tax-deferred until withdrawn.*
Simplified Employee Pension (SEP) Plans
A Simplified Employee Pension plan is an employer sponsored retirement plan that has minimal IRS reporting and disclosure requirements for compliance. The employer deposits contributions into the IRA of each plan participant thereby simplifying the accounting process.
Contributions
A SEP plan is funded by the employer. The contribution limit for a SEP plan is the lesser of 25% of an individual employee’s compensation or $44,000 (indexed for 2007) and is generally allocated on a uniform percentage of salary basis.
Advantages
A SEP plan is easy to set up. It is comparable to an employer establishing and funding a “company provided IRA” for the benefit of each employee.
SIMPLE IRA Plans
An employer maintaining a SIMPLE plan may not maintain any other qualified plan in which the employees currently receive benefits. Employees may defer up to $10,000 (indexed for 2007), with no set maximum percentage of compensation. There are “catch up provisions” for employees over age 50 which permit an additional $2000 contribution.
Contributions
The employer must make a mandatory contribution as either a matching dollar-for-dollar contribution on the first 3% elective deferral or a 2% uniform contribution to all eligible employees, regardless of whether they made an elective deferral.
Advantages
A SIMPLE plan is not subject to many of the tests applicable to other retirement plans. As a result, there are minimal plan administration costs, and highly paid or owner-employees are not restricted in their ability to defer as a result of low participation by the lower-paid employees.
Profit Sharing Plans
Profit sharing plans offer both design flexibility and discretion as to making contributions. Company contributions are determined by the employer and can be allocated in a number of ways. If the company makes little or no profit during a year, no contribution is required, although low profits don’t restrict the contribution level
Contributions
An employer’s maximum deduction is limited to 25% of the annual compensation paid to eligible employees. The individual maximum contribution limits for employees is the lesser of 100% of compensation or $44,000.
Advantages
The employer can make a discretionary contribution each year, which can be subject to a vesting schedule and the plan may be integrated with Social Security.
Age Weighted/Comparability Tested Profit Sharing Plans
These plans utilize allocation methods that base contributions on both the age and compensation of eligible employees, similar in concept to a defined benefit pension plan, but with discretionary contributions.
Contributions
In an age-weighted plan, the participant’s age, or length of time until retirement, is factored into the allocation formula on an individual basis. The plans favor older participants who receive a larger proportionate share of the contribution. The comparability plan allows the employer to select classes of employees that provide for different contribution allocation levels. The plan requires that various non discriminatory test be passed for the plan to be acceptable.
Advantages
An age-weighted plan may be appropriate if a business wants to favor older, highly paid participants. Comparability plans allow an allocation that benefits a specific class of (older)employees.
401(k) Profit Sharing Plans/ Roth 401(k) Profit Sharing Plans
A 401(k) plan is a type of profit sharing plan that includes an elective salary deferral provision. The employer typically has the ability to make a matching contribution that is tied to the elective salary deferral, as well as a profit sharing contribution that is allocated to all eligible participants. Plan participants usually have the ability to select their own individual asset allocation from various investment alternatives available to the plan.
A Roth 401(k) plan is a new feature of a 401(k) plan that permits participants to make after tax salary deferrals into a 401(k) plan. If the employer elects to offer the Roth 401(k) provision, participants will have a choice of making pre-tax or after-tax salary deferrals.
Contributions
The three common 401(k) contribution types are:
-
Elective salary deferral – the employee can defer up to $15,000 for 2007. (This is an indexed amount subject to cost of living adjustments and may change each year.)
-
Employer matching – the employer can make a discretionary contribution based on a percentage of the employee’s elective salary deferrals.
-
Profit sharing – can be allocated in any method available to regular profit sharing plans.
An employer’s maximum deduction is limited to 25% of the annual compensation paid to eligible employees.3 In addition, the employer must meet several non-discrimination tests, which may further limit the amounts deferred by certain highly paid employees.
Employees age 50 and older may make a $5,000 catch-up contribution, which does not count against their individual maximum annual additions limit of the lesser of $44,000 or 100% of compensation.
Advantages
A 401(k) plan allows both employer and employees to contribute toward retirement while reducing the current tax burden of both. Because employees are actively involved as participants, 401(k) plans typically have a high visibility level in terms of the employee’s perception of the benefit being provided by the employer.
3Only employer matching and profit sharing contributions.
401(k) Safe-harbor Plans
A safe-harbor 401(k) plan is not subject to non-discrimination tests, therefore all employees have the opportunity to maximize deferrals.
Contributions
Contribution types and limits are the same as those for a 401(k) profit sharing plan, with a “safe-harbor” exception. To qualify for the exception, the employer must make a 100% vested contribution of either:
- 3% of compensation for each eligible employee or
- A matching contribution of up to 4% of compensation.
The safe harbor then permits the owner and other highly compensated employees to defer the maximum without regard to the deferral levels of the non-highly compensated employees.
Advantages
In addition to the advantages offered by a 401(k) profit sharing plan, the safe-harbor 401(k) avoids the non–discrimination testing that may limit the amounts the highly compensated employees may defer.
Owner Only/One-person 401(k)
A recent tax law permits the owner/partner/shareholders of a small business, and their spouses, to maximize contributions if net compensation is less than $176,000 (indexed for 2007).
Contributions
Contribution types and limits are the same as those for a 401(k) profit sharing plan, including Roth 401(k) salary deferrals.
Advantages
Discrimination testing is not required until an employee other than an owner/partner/shareholder or their spouse enters the plan.
Defined Benefit Pension Plans
A defined benefit pension plan is designed to provide a specific benefit amount at retirement. This is the traditional pension plan in which the employer bears the risk of providing the promised level of retirement benefits to participants.
Contributions
Unlike the defined contribution plans previously discussed, the defined benefit plan limit is based on the benefit to be received at retirement, not on the annual contribution. Each year the plan’s actuary determines the required annual contribution based on several factors such as age, salary level and years of service, as well as interest rate assumptions. The maximum annual benefit for which a plan may fund is the lesser of 100% of the participant’s compensation up to $175,000 (indexed for 2007).
Advantages
For participants closer to retirement, contributions to a defined benefit plan may exceed the 100% or $44,000 limit imposed by defined contribution plans. This may be advantageous to a business owner who is approaching retirement age, has never started a retirement plan and wishes to put away as much money as quickly as possible. A defined benefit plan can also be advantageous for an employer
Qualified Retirement Plan Comparison
|
Plan Type
|
Ideal For
|
Maximum Annual Contribution
|
Eligibility
|
Contribution Obligation
|
Plan Set-up Deadline
|
Contribution Deadline
|
Plan Features
|
|
Simplified Employee Pension (SEP)
|
Smaller firm, corporate or non-corporate, seeking to minimize filings, paperwork and overall cost.
|
The lesser of 25% of employee’s net compensation or $44,000 (indexed for 2006).
|
Any employee age 21 or older who has worked for the employer in any three of the preceding five years must be eligible.
|
Discretionary. An eligible participant shares in the current year contribution if they earned in excess of $450 (indexed for 2006).
|
On or before employer’s due date for filing federal tax returns (including extensions).
|
On or before employer’s due date for filing federal tax returns (including extensions).
|
|
|
SIMPLE IRA (Savings Incentive Match PLan for Employees of small employers)
|
Employer with 100 or fewer employees (earning $5,000 or more) during the past year wanting a plan that allows employee elective salary deferral contributions, requires minimal IRS reporting and has minimal cost.
|
Elective salary deferral limit of $10,000 (indexed for 2006), with no limit as to percentage of compensation. Mandatory employer contribution to eligible participants. No additional contribution can be made.
|
Any employee who has earned $5,000 from the employer in any two preceding years and is expected to earn $5,000 in the current year must be eligible.
|
Elective salary deferrals are not subject to non-discrimination tests. Mandatory employer contribution of either 3% match or 2% non-elective to all eligible employees.
|
October 1 for start-up plans. Employees must have 60-day election period prior to January 1 (or the first day they are eligible) in which they can modify elections.
|
Salary deferrals should be deposited as soon as administratively feasible. The employer contribution deadline is the same as the SEP plan.
|
|
|
Profit sharing
|
Employer seeking flexibility of discretionary contributions and the ability to impose a vesting schedule on these contributions.
|
Employer contribution is limited to 25% of total eligible compensation. Depending on the allocation method used, an individual participant could receive up to the lesser of 100% of compensation or $44,000.
|
Employees age 21 or older with one year of service must be eligible if a vesting schedule is imposed. A two-year eligibility period may be imposed if immediate vesting is provided.
|
Discretionary.
|
December 31 (or end of employer’s tax year).
|
On or before employer’s due date for filing federal tax returns (including extensions).
|
|
|
Age-weighted or comparability profit sharing
|
Small business or professional practice wishing to favor either the older employees or a specific group of employees.
|
Employer contribution is limited to 25% of total eligible compensation. These allocation methods allow an individual participant to receive up to the lesser of 100% of compensation or $44,000.
|
Employees age 21 or older with one year of service must be eligible if a vesting schedule is imposed. A two-year eligibility period may be imposed if immediate vesting is provided.
|
Discretionary.
|
December 31 (or end of employer’s tax year).
|
On or before employer’s due date for filing federal tax returns (including extensions).
|
|
|
401(k) *Includes Roth 401(k)
|
Employer with more than 25 employees wanting a plan that allows employee elective salary deferrals.
|
Elective salary deferral limit of $15,000 (indexed for 2006). Overall individual limit (deferrals plus employer contributions) is 100% of compensation up to $44,000. Employer contribution limit (including deferrals) is 25% of eligible payroll.
|
Employees age 21 or older with one year of service must be eligible to make elective salary deferrals if a vesting schedule is imposed on employer contributions. See preceding profit sharing plan section as to eligibility for employer contributions.
|
Elective salary deferrals optional but subject to non-discrimination test. Employer may choose to match employee elective deferrals and/or make a discretionary profit sharing contribution.
|
December 31 (or end of employer’s tax year).
|
Salary deferrals should be deposited as soon as administratively feasible. Employer contribution deadline is on or before employer’s due date for filing federal tax returns (including extensions).
|
|
|
Safe-harbor 401(k) *Includes Roth 401(k)
|
Employer wanting a plan that allows employee elective salary deferrals, without non-discrimination testing.
|
Elective salary deferral limit of $15,000 (indexed for 2006). Overall individual limit (deferrals plus employer contributions) is 100% of compensation up to $44,000. Employer contribution limit (including deferrals) is 25% of eligible payroll.
|
Employees age 21 or older with one year of service must be eligible to make elective salary deferrals if a vesting schedule is imposed on employer contributions. See preceding profit sharing plan section as to eligibility for employer contributions.
|
Elective salary deferrals are not subject to non-discrimination tests. Mandatory employer contribution of either 3% non-elective to all eligible employees or match of up to 4%.
|
October 1 of year in which plan is started. Employees must have election period of 30 to 90 days immediately preceding January 1 (or the first day they are eligible) in which they can modify elections.
|
Salary deferrals should be deposited as soon as administratively feasible. Employer contribution deadline is on or before employer’s due date for filing federal tax returns (including extensions).
|
|
|
Owner only/one-person 401(k) *Includes Roth 401(k)
|
Employer where the only employees are owners/partners/shareholders and their spouses, earning less than $176,000 each, and seeking to maximize employer contributions.
|
Elective salary deferral limit is $15,000 (indexed for 2006), plus employer contributions of up to 25% of compensation. Overall individual limit (deferrals plus employer contributions) is 100% of compensation up to $44,000, plus any catch-up contribution.
|
Employees age 21 or older with one year of service must be eligible to make elective salary deferrals if a vesting schedule is imposed on employer contributions. See preceding profit sharing plan section as to eligibility for employer contributions.
|
Discretionary.
|
December 31 (or end of employer’s tax year).
|
Salary deferrals should be deposited as soon as administratively feasible. Employer contribution deadline is on or before employer’s due date for filing federal tax returns (including extensions).
|
|
|
Defined benefit
|
Employer wanting to offer a fixed benefit or to favor older employees. Ideal for a small business owner at least 45 years of age who never sponsored any type of retirement plan.
|
An actuarially calculated amount, based on a benefit not to exceed 100% of a participant’s compensation, up to an indexed figure currently at $175,000 for 2006.
|
Employees age 21 or older with one year of service must be eligible if a vesting schedule is imposed. A two-year eligibility period may be imposed if immediate vesting is provided.
|
Mandatory, based on specified benefit formula. Amount is determined by an actuary and requires quarterly minimum contributions.
|
December 31 (or end of employer’s tax year).
|
On or before employer’s due date for filing federal tax returns (including extensions).
|
|