What type of plan is ideal for my situation?
The retirement industry is highly complex and ever-changing. You need to partner with an expert that has the depth of knowledge and technology resources to help you maximize your clients’ investment opportunities and minimize their exposure to risk.
RPS designs and administers a full range of plan types:
- Safe Harbor 401(k)
- Profit sharing
- New Comparability/Cross-Tested
- Cash Balance
Continue reading below for brief descriptions of the various plan types that are available to employers:
A traditional 401(k) Plan is a defined contribution plan which:
- Allows Employees to make elective deferrals through payroll deductions and direct the investment of their contributions.
- Employee contributions are always 100% vested and can be made in the form of pre-tax or ROTH contributions, regardless of their income limit.
- A match or a profit sharing feature may be added to the plan and may be subject to a vesting schedule for the company portion of the account.
- The Employer may limit eligibility for the plan.
Safe Harbor 401(k) Plans
The Safe Harbor 401(k) Plan is a defined contribution plan similar to a traditional 401(k) Plan with the following variations:
- The safe harbor plan design allows for all employees, including HCEs, to maximize their personal accounts.
- The benefit of this design is that it alleviates the need for year-end compliance testing generally required for a 401(k) plan.
- The Employer must make either an “Employer Match” of a specified formula OR an Employer “Profit Sharing” Contribution of a specified percentage.
- The employer contribution, match or profit sharing, must be 100% vested immediately.
- All eligible employees must be notified annually, at least 30 days but not more than 90 days prior to the beginning of the following plan year, of the plan sponsor’s intent to be a safe harbor plan for the year.
Profit Sharing Plans
A Profit Sharing Plan is a defined contribution plan which allows Employers to make contributions on behalf of their eligible employees.
- All contributions to the plan and investment earnings compound tax-deferred until withdrawn at retirement.
- Profits are not required to make a contribution to the plan.
- Contributions to the plan are discretionary, which allows the employer to increase or decrease contributions based on company performance. Or the Employer has the option not to contribute during a particular plan year.
- Contributions are deductible on the Employer’s federal income tax return.
A 403(b) Plan is a tax deferred retirement plan available to employees of religious or educational institutions and certain non-profit organizations as determined by section 501(c)(3) or the Internal Revenue Code.
- Contributions and investment earnings grow tax deferred until withdrawn, at which time they are taxes as ordinary income
- All employees of an organization must be eligible to contribute to the plan, with a few exceptions.
- Employer contributions can be subject to eligibility and allocation conditions.
- Employee contributions can be made in the form of pre-tax or ROTH contributions, regardless of their income limit.
Cross-Tested/New Comparability Plans
A Cross-Tested/New Comparability Plan is a defined contribution plan that uses a certain testing method to show the plan does not discriminate in favor of highly compensated employees based on calculations that analyze projected benefits at retirement age.
- The benefit of the design is that it allows employees to be divided into two or more groups with a discretionary contribution formula for each group
- A Cross-Testing feature may be added to an existing 401(k) Plan.
- This design is attractive to an employer where the HCEs are generally older than the NHCEs.
- This plan design does not work for all Employers. The Plan must pass a test each year to ensure the projected benefit is nondiscriminatory. In addition, it is possible to pass such test one year and fail the next year.
Cash Balance Plans
A Cash Balance Plan is a type of IRS-qualified retirement plan known as a “hybrid” plan.
- In a Cash Balance Plan, each participant has an account that grows annually in two ways: first, an employer contribution and second, an interest credit which is guaranteed rather than dependent on the plan’s investment performance.
- It is more expensive to set-up and administer a Cash Balance than a 401(k) Profit Sharing plan because the plan’s funding must be certified by an actuary each year. However, the tax benefits of the Cash Balance plan will often significantly exceed the additional cost.
- The employer contribution is determined by a formula specified in the plan document. It can be a percentage of pay or a flat dollar amount.
- Plan assets are pooled and invested by the trustee or investment manager not the participant.
- Cash Balance plans are attractive to Employers where:
- Owners desire to contribute more than $45,000 per year to their account.
- Companies have demonstrated consistent profit patterns.
- Companies are already contributing 3-4% to employees, or at least willing to do so.
- Owners are over 40 years of age and desire to “catch-up” or accelerate their retirement savings.
A 457 Plan is a “nonqualified” deferred compensation plan that is maintained by a tax-exempt organization.
- Employees set aside money for retirement on a pre-tax basis through a salary deferral agreement with their employer. Under this arrangement, the employee agrees to take a reduction in salary.
- Contributions grow tax-free until withdrawn at retirement or termination of employment.
- Only eligible for HCEs and management employees.
- The contribution limit is the same as in a 401(k) or 403(b) Plan but the contributions of the two plans are not aggregated, so a participant may contribute the maximum to the two plans simultaneously.