Types of Plans

Retirement plans that meet certain requirements under section 401(a) of the Internal Revenue Code are considered qualified retirement plans. They may be appropriate for businesses of various sizes, depending on the program and the provider.

  • Employer contributions are tax-deductible and may be subject to vesting schedules.
  • Participant contributions are always immediately vested.
  • Contributions (employer and participant) and earnings are tax-deferred until they’re withdrawn. However, if the plan offers a Roth option, employees’ Roth contributions are taxed upfront; these contributions grow tax-deferred and are tax and penalty free when taken in a qualified withdrawal.

Employers offering qualified plans also take on specific fiduciary responsibilities. There are reporting and disclosure requirements. Plans also require an annual Form 5500 filing with the Department of Labor, supplying participants with a summary of plan provisions and various other notices, depending on the plan’s terms.

Annual Limits for 2016

  • Compensation: $265,000
  • Defined Contribution Plan Contribution: $53,000
  • 401(k), 403(b), 457 Salary Deferral: $18,000
  • 401(k), 403(b), 457 Salary Deferral, if 50 or Older: $24,000
  • SIMPLE IRA Deferral: $12,500
  • SIMPLE IRA Deferral, if 50 or Older: $15,500
  • SEP IRA Contribution: $53,000
  • IRA Contribution: $5,500
  • IRA Contribution if 50 or Older: $6,500

401(k) plans

A 401(k) plan allows employees to contribute a portion of their pretax salary to a tax-deferred retirement plan. Some plans may offer a Roth option, in which case employees’ Roth contributions are taxed upfront; these contributions grow tax-deferred and are tax and penalty free when taken in a qualified withdrawal.

  • Some companies provide a matching contribution as an extra incentive for the participants to contribute.
  • In-service distributions for certain hardships can be allowed, or participants can take in-service distributions starting at age 59–1/2.
  • Participant deferrals do not count toward the deductible limits.
  • Matching contributions may be subjected to a vesting schedule. Both participant and employer-matching contributions are subject to discrimination testing.
  • Employer contributions and match (if any) are deductible business expenses.

If you’re self-employed, a Solo 401(k) is an option. It offers many of the same advantages of a 401(k), including flexible contributions and the ability to take loans. Plus, setup costs are low and it can cover you and a spouse.

Profit-sharing plans

A profit-sharing plan, which features discretionary contributions, can be tied to company profits (meaning the employer — during a difficult business year — may decide to make no contributions to the plan at all).

  • Up to 25% of covered pay can be contributed each year.
  • In-service distributions can be made available after five years of participation or when the participant reaches age 59–1/2.
  • Hardship withdrawals are also available.

Money purchase plans

A money purchase plan is a pension plan that has a mandatory annual contribution.

  • Company contributions can be as high as 25% of covered pay (the contribution formula is set by the plan terms).
  • Contributions can be subjected to a vesting schedule.
  • In-service distributions are generally not available until a participant reaches the plan’s normal retirement age, or age 62, if later.

Simplified Employee Pension plans (SEPs)

Available to any employer or sole proprietor, though suited for smaller businesses, a SEP offers many of the tax benefits of the qualified plans — with fewer administrative expenses.

  • SEP contributions are discretionary and can be up to 25% of pay for each eligible employee.
  • Participant contributions are not allowed.
  • All employer contributions are made to IRAs for the benefit of the eligible employees and are 100% immediately vested.
  • Contributions and earnings grow tax-deferred until the money is withdrawn by the participant.
  • Employer contributions are deductible business expenses.
  • Plans are easy to set up and administer, with minimum paperwork and no complex IRS reporting requirements.

Savings Incentive Match Plans for Employees (SIMPLE) IRAs

A SIMPLE IRA is a retirement plan for small businesses with fewer than 100 employees.

  • The company must either match participant contributions (dollar for dollar up to 3% of pay) or make a contribution of 2% of pay for all eligible participants.
  • Contributions are 100% immediately vested.
  • Certain notices must be provided annually to eligible employees.
  • Employer match is a tax-deductible business expense.
  • Plans are low cost, and easy to set up and administer with no complex IRS reporting requirements.

403(b) plans

A 403(b) is a tax-favored retirement plan for employees of school systems, nonprofit hospitals, religious organizations and other tax-exempt employers [known as 501(c)(3) organizations].

  • Participants can make pretax or Roth contributions and some organizations match these contributions.
  • Similar to a 401(k) plan, participant contributions are 100% immediately vested, but matching contributions may be subjected to a vesting schedule.
  • 403(b) programs that are subject to ERISA have to file form 5500.
  • Similar to a 401(k), matching contributions may be subject to discrimination testing (does not apply to government or church plans)

Payroll deduction IRAs

A payroll deduction IRA is an employee-owned IRA for which the employee decides how much and how often to contribute.

    • Employees may choose to invest in either a traditional or a Roth IRA.
    • Withdrawals can be taken at any time, subject to tax and possible penalties.
    • Programs are low cost, and easy to set up and administer with no complex IRS reporting requirements.
      Regardless of the type of plan, tax-deferred investing can help both employers and participants maximize retirement savings.

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