For many years, Qualified Retirement Plans have been one of the most advantageous investments for both employers and employees. Employer contributions are fully deductible as a business expense; and, Employee Salary Reduction Contributions under a 401(k) Plan will reduce the employees’ federal income tax liability. Participating employees are not taxed on contributions toward their benefit until withdrawn. Furthermore, all investment earnings are exempt from income tax during accumulation. Generally, no funds can be distributed except in the case of death, disability, retirement or termination of employment. In the case of termination of employment, the vested balance is distributable; however, there is usually a 10% IRS penalty in addition to normal income taxes for those under age 59 1/2. When distribution is made, income taxes must be paid on the amount distributed unless a direct transfer is made into another qualified plan or IRA. As with IRA’s, distributions must begin by attainment of age 70 1/2.
DEFINED BENEFIT PLANS – Benefits are predetermined by formula. Annual required contributions are based upon the benefit formula selected. This type of plan generally favors older, higher paid employees. I.E., Maximum contributions can be in excess of $100,000 (depending upon actuarial factors) for older, key employees. Contributions for younger employees are significantly lower since there are more years to fund for their benefit.
DEFINED CONTRIBUTION PLANS – Contributions are predetermined by formula. Maximum individual contribution (including employer and employee contributions, and any forfeitures) is the lesser of 25% of gross salary, or $57,000 (for 2020). Also, employee contributions under a 401(k) Plan are not considered for purposes of the 25% overall plan total contribution limits.
401(k) – Employees may elect Roth and/or salary deferral contributions – up to a maximum of $19,500 (for 2020). Supplementary “catch up” contributions ($6,500 additional) may also be made by those employees age 50 or over. Employer may match any percent of the employees’ contributions desired (including top dollar limits for the matching). An optional employer profit sharing contribution may also be made. Discrimination testing is required, but may be eliminated by “safe-harbor” 100% vested employer contributions of: (a) 100% matching of the first three percent of employee deferrals, plus 50% matching of the next two percent; or (b) a flat 3% employer “profit sharing” contribution (ie, all eligible employees receive such contribution – regardless of whether they elect to personally contribute or not).
Profit Sharing – Deposits determined by a flexible contribution formula. Annual contribution must be between 0% and 25% of salary. Allocation formulas based upon age and other factors (to benefit key employees) are allowed – including age-based, integration with social security and cross-tested comparability plans.
Pension Concepts – Employee Benefit Specialists since 1974