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Defined Contribution Plans



Defined contribution plans generally put a percentage of current salaries into the plan each year. The amount at retirement will depend on the investment return and number of years until a participant retires. There are several variations of defined contribution plans. Some of the more common include:
    Money purchase pension: The employer contributes a specified percentage of the participating employees salary each year. Whatever that fund grows to is what the retiring employee receives.

    Target benefit pension plan: The target benefit plan has elements of both the defined benefit and defined contribution plans. The benefits are determined as if the plan were a defined benefit plan, while the defined contribution plan annual contribution percentage and dollar amount limitations apply to the actual contributions.

    Traditional profit sharing plan: Similar to the money purchase pension, except that contributions do not need to be a specified percentage and they do not need to be made every year, as long as they are substantial and recurring.

    Age-weighted money purchase and profit sharing plans: Money purchase and profit sharing plans in which employer contributions are allocated to provide an assumed equivalent retirement benefit at normal retirement age.

    Cross-tested or super-integrated money purchase and profit sharing plans: These plans establish groups of participants to which are allocated specified allocation percentages. They must satisfy very complicated discriminatory requirements under Reg. 1.401(a)(4).

    Stock bonus plan: Similar to the traditional profit sharing plan. The plan may, but is not required to, invest primarily in the employer's stock.

    ESOP – Employee stock ownership plan: Like a stock bonus plan, to which the employer can contribute company stock instead of cash. The plan must be primarily invested in company stock.

    IRC Sec. 401(k) plan: Also called a cash or deferred plan, this plan is any stock bonus plan or profit sharing plan which meets certain participation requirements of IRC Sec. 401(k). An employee can agree to a salary reduction or to defer a bonus which he or she has coming.

    SIMPLE plans: SIMPLE stands for savings incentive match plan for employees. SIMPLE plans can be in either an IRA format or a 401(k) format.

    SEP: This stands for simplified employee plan. An SEP is a group of individual IRAs established for employees to which the employee could contribute to a traditional IRA or Roth IRA.

Determining whether a defined benefit or a defined contribution plan is best for you will depend on several factors including your goals as an employer, as well as available cash flow. To help provide a more in-depth understanding of the different plans available please download a PDF of our brochure, Choosing the Right Retirement Plan.

 

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