Profit Sharing Plans

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Profit Sharing plans are an efficient tool to increase employee motivation and retention. The key distinction between the types of profit sharing plans is in the contribution allocation formula.

    401(k) Plans


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401(k) plans were introduced in the early eighty's as a plan design to allow employees to start contributing to their retirement on a pre-tax basis. Previous to the 401k companies were sponsoring Thrift Savings Plans which only allowed post tax contributions by employees. 401k's can not stand alone but must be part of a profit sharing plan or a stock bonus plan. With this design, both employees and employers can make contributions to the same plan. Recent options added to improve 401(k) plans are the "Safe Harbor" and the "Roth Contribution"

         Defined Benefit Plans


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     Defined Benefit plans by definition are plans that promise a specific benefit paid to at some time in the future. We'll take a look at Traditional, Cash Balance and 412(i) plans
An example of this benefit could be 65% of an employees salary starting at age 65.

     A defined benefit plan is not an individual account plan. If a plan is categorized as a defined benefit plan then plan formulas are geared to benefits rather than contributions; the funding amount is actuarially determined; benefits are insured by PGC for plans of more than one participant.Forfeitures reduce the company's cost of providing benefits.

     Defined benefit plans are funded entirely by the employer, who makes annual contributions to cover the cost of the plan . Additionally, employers are responsible for making up any investment losses of the plan. Because of this funding responsibility, it would not make good economic sense for a company to start a defined benefit plan if the company has a weak cash position

              Solo K, SEP IRA,
   SIMPLE IRA /401K



                                                      S.E.P. 
                                 Simplified Employee Pension plan.

Under a SEP, employers make contributions to traditional Individual Retirement Arrangements (IRAs) set up for employees (including self–employed individuals), subject to certain limits. 
Establishing a SEP, you:
• Can be a business of any size, even self-employed.
• Must adopt a SEP plan document.
• Generally cannot have any other retirement plan.

Under a SEP, you, the employer, make contributions to traditional IRAs (SEP-IRAs) set up for each of your eligible employees. A SEP is funded solely by employer contributions. Each employee is always 100% vested in (or, has ownership of) all money in his or her SEP-IRA. 


                                           S.I.M.P.L.E.
         Savings Incentive Match Plan for Employees

An employer can choose to set up the SIMPLE plan as a 401(k) salary deferral plan or as an IRA for each employee. With an IRA SIMPLE plan, the maximum annual employee contribution is $10,000 adjusted annually for inflation.

The employer has two tax-deductible matching alternatives:
(1) generally, the employer must match 100% of employee contributions up to 3% of each individual's compensation. (The employer may also elect a lower match that is no less than 1% of employee elective contributions. But this lower match option can be used in only two out of any five years.)

(2) The employer can contribute 2% of compensation on behalf of each eligible employee even if an employee makes no elective contributions. Employees' elective contributions are income-tax deferred. 


 

  IRA


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IRA's are Individual Retirement Accounts. There are currently two varieties: Traditional and Roth. Both types of IRA's can be independently funded  or they can receive funds transferred from other IRA's or qualified plans.