More Ways to Optimize Contributions
Selecting the right plan design can unlock additional opportunities to maximize contributions while aligning with your company’s goals and workforce structure. The options below explain a range of strategies; each has unique advantages, requirements, and levels of complexity. We can help you choose the right options to tailor your retirement plan for greater efficiency and impact.
New Comparability / Cross-Tested
This type of profit sharing Plan uses an allocation formula to divide employees into groups; classifying them as “preferred” and “non-preferred”. Based upon relative age and compensation, contributions are allocated within each group. Adding a 401(k) salary-deferral option is allowed with this type of Plan design. Complex actuarial contribution calculations and nondiscrimination testing are typically associated with these types of Plans.
Age-Weighted
This type of profit sharing Plan uses an allocation formula to divide employees into groups; classifying them as “preferred” and “non-preferred”. Based upon relative age and compensation, contributions are allocated within each group. Adding a 401(k) salary-deferral option is allowed with this type of Plan design. Complex actuarial contribution calculations and nondiscrimination testing are typically associated with these types of Plans.
Traditional
This type of defined contribution Plan allows for participating employees to make contributions to their company’s retirement Plan before taxes are deducted from their pay. There are several types of 401(k) Plans such as safe harbor 401(k)s, SIMPLE 401(k)s, and others, which can have a variety of differing features and requirements.
Cash Balance
This type of Plan is a defined benefit Plan, not a defined contribution Plan, which defines a “pay credit” and an “interest credit” for each participant, which can be fixed or linked to a variable rate. When a participant becomes entitled to his or her benefit, typically upon retirement, a participant may have the option to collect the benefit via annuity-type payments based upon his or her account balance, or as a lump-sum payment.
Integrated
This type of pension Plan is linked to a person’s Social Security benefits. A person’s pension Plan benefits are combined with his or her Social Security payments to reach a specific total amount. A pension benefit may be reduced by up to 50% depending on a person’s actual Social Security payment to attain a specified total pension goal.
Money Purchase
This type of Plan requires set annual employer contributions to Plan participants. Participants may also contribute in this type of Plan. Money Purchase Plans can be implemented in addition to some other Plan types, potentially allowing for high savings rates. However, if the set minimum contribution requirement is not satisfied, an excise tax may be applied. Like other Plan types, Money Purchase Plans are subject to anti-discrimination testing and it requires the filing of a Plan 5500.
Defined Benefit
Commonly referred to as pension plans, this type of Plan is funded by the employer, not the employee, and it promises participants a specific monthly benefit upon their retirement. Benefits are often calculated factoring an employee’s age, years of service, and salary. They are governed by the Federal Employee Retirement Income Security Act (ERISA) and are, in most cases, insured by the Pension Benefit Guaranty Corp.
Deferred Compensation / Non-Qualified
This term typically refers to a “non-qualified” deferred compensation agreement in which an employee consents to receive a withheld portion of salary as payments at a later point in time. The payments made by the employer are not tax-deductible and are not limited to caps imposed on “qualified”, (ERISA compliant), defined contribution or defined benefit Plans. Deferred compensation is available to senior management and highly compensated employees, and it can be offered as a retention tool when there is a risk that an integral employee may leave the company.