Untitled Document
Employer-Sponsored Retirement Plans
 

A Basic Guide to Employer-Sponsored Retirement Plans

Defined Benefit Plans  
For all businesses; attractive to firms with key employees who are over age 50 and substantial excess cash flow
Contributions by employer; allows highest contributions and tax deductions
Can be expensive to fund if business has many employees; contributions are required regardless of business profits and losses; investment risk assumed by employer
Maximum Annual Contributions for Plan Year 2006: Determined by actuary; funding contributions cannot exceed an annual retirement benefit of $175,000
Administration is complex and requires annual actuarial review
   
Defined Contribution Plans
 
For all businesses; different types of plans available to meet needs
Contributions by employee and/or employer; percentage of each participant’s salary put into the plan each year, subject to applicable limits; investment risk assumed by employee
Limit imposed on contributions allowable for owner and key people much lower than for defined benefit plans
Maximum Annual Contributions for Plan Year 2006: Depends on plan type (see below)
Administrative requirements depend on plan type (see below)
   
Types of Defined Contribution Plans
 
Owners-only 401(k)
 
401(k)  
Safe Harbor 401(k)  
Profit Sharing  
Money Purchase  
   
Owners-Only 401(k) Plan
 
For a sole owner plus family members or partners — no common law employees
Allows maximum annual deductible contribution for defined contribution plans and is easy to implement
Use is limited to single-owner businesses (partners, relatives may be allowed)
Maximum annual contributions for Plan Year 2006: $15,000 (plus $5,000 catch-up for those over age 50). Plus optional profit-sharing plan enables you to contribute 25% of salary (20% of selfemployment income) up to $44,000 (plus catch-up). The 415(c) limit includes any deferrals under 403(g).
Minimal administrative requirements
     
Safe Harbor 401(k) Plan
 
Any size company; businesses that wish to enable key employees to save more for retirement
Key employees can make substantial salary deferral and catch-up contributions
Employer matching required and immediately vested
Maximum Annual Contributions for Plan Year 2006: Same as 401(k)
   
   
Profit-Sharing Plan  
Any size business
 
Like SEP IRA, contributions from employers only; may be used in conjunction with 401(k); contribution levels can vary from year to year or skipped
Administration can be complex  
Maximum Annual Contributions for Plan Year 2006: No employee contributions; employer may contribute up to 25% of compensation, up to $44,000
Moderate to high administrative requirements  
     
Money Purchase Plan  
• Any size business
Like Profit-Sharing, contributions from employers only; may be combined with 401(k); yearly contribution levels are fixed when plan is established
Administration can be complex; lacks flexibility — employer contributions must be made every year, regardless of business performance
Maximum Annual Contributions for Plan Year 2006: No employee contributions; employer must contribute at predetermined amount from 25% of compensation, up to $44,000
Moderate to high administrative requirements
     
Age-Weighted/New Comparability Plan  
Types of profit sharing plans for businesses that wish to enable key employees to save more for retirement; may be used in conjunction with 401(k) plan
Higher contribution percentage may be made for older workers (age-weighted) or by ownership, tenure, etc. (new comparability)
Require more complicated IRS documentation and testing
Maximum Annual Contributions for Plan Year 2006: Same as Profit Sharing
More complex than 401(k)
     
Other Tax-Favored Retirement Plans
SEP-IRA  
Suitable for sole proprietors or business with few employees who want simplicity
Easy to set up and maintain; flexible contribution options; annual contributions not required
Employer must make contributions for virtually all employees; immediate vesting
Maximum Annual Contributions for Plan Year 2006: 25% of salary or 20% of self-employment income up to $44,000 per person
No annual filings
   
SIMPLE IRA
Best for businesses with few employees – maximum 100
Employees and employer may contribute; simpler to administer than 401(k)
Annual contribution required; lower contribution limits; immediate vesting
Maximum Annual Contributions for Plan Year 2006: Not to exceed $10,000 (plus $2,500 catch-up)
No annual filings
   

Non-Qualified Deferred Compensation Plans

For C corporations with highly compensated key employees
Additional savings and potentially higher retirement income for highly compensated employees; not all employees covered; not subject to discrimination testing; may be used in conjunction with qualified plans
No tax deduction for contributions; limited investment choices; administration and trust expenses
Requires plan document; Rabbi Trust; No 5500 filing
No maximum annual contributions, amount determined by employer
Risk of forfeiture
Can be used in conjunction with qualified retirement plans

 

 
 
 
Gospich Advisors, LLC
Phone : (718) 674-2291 E-mail: info@gospichadvisors.com