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Why is it important to have a Qualified Plan?

Even though employer-sponsored retirement plans have grown increasingly popular in the past 20 years, a lot of businesses still do not have a qualified plan. The benefits of a qualified retirement plan can be exponential.  One of the biggest benefits of a qualified retirement plan is the significant tax savings.  These savings are not available for non-qualified plans.  Qualified retirement plans allow your business to attract and retain key employees all while providing protected benefits for yourself and your staff.

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What plan best fits your business?

Defined Contribution Plans

Defined Contribution plans are plans in which a certain amount or percentage of money is set aside each year either by the employer or the employer and employee.

This is a type of defined contribution plan sponsored by the employer. It allows eligible employees who have met the requirements to enter the plan the right to make contributions into the 401(k) Plan. Generally the contributions are deducted through payroll either on a pre-tax 401(K) contribution or a post-tax Roth contribution. Some of the plans also have an employer match feature were the employer will match up to a certain percentage or dollar amount. A diverse level on investments may also be available in your retirement plan that would be set up through an advisor of your choosing.
Employees automatically participate in this plan and contribute a designated percentage of their pay. These plans generally encourage higher rates of participation. Because these automatic enrollment plans require an election NOT to participate, far more employees will end up covered. The result is that the nondiscrimination testing is easier to pass. However, it can also raise employer costs for matching contributions, as well as administrative costs, since so many more employees will end up participating in the plan.
These types of 401(k) plans are exempt from the nondiscrimination testing in exchange for the employer providing a certain level of fully vested contributions to rank-and-file employees, either as a minimum percentage of pay for all eligible employees or as a required rate of matching contributions.

Profit Sharing Plans

With a profit sharing plan the employer has the discretion to make a contribution on an annual basis.  Generally there are no minimum amounts required and each contribution can be flexible based on how well the company performs during the year.  The majority of the time it is accompanied with 401k plans. In profit sharing plans, the most any employee can receive in one year is subject to IRS limits.

New Comparability Profit Sharing Plans

In New Comparability Profit Sharing Plans, the employees who are eligible and have met the requirements to participate in the profit sharing portion of the 401(k) plan are placed in  tiers so that the allocations are no longer a uniform percentage of employee compensation. This allows the employer more flexibility when it comes to favoring certain select groups of employees by providing greater contributions. IRS Regulations require that New Comparability Profit Sharing Plans to be tested each year so that the allocations are nondiscriminatory.  This type of plan can be designed to allow an employer to offer key employees a higher allocation all while still meeting the contribution requirements deemed sufficient to meet the coverage and nondiscrimination testing that has been set forth by the IRS.

Defined Benefit Plans

These plans are termed 'defined' because the formula for calculating the employer's contribution is known ahead of time.  The plan is designed to define the benefits that are to be paid out when they reach the age of retirement. This fund is different from other pensions funds, where the amount of payouts depends on the return of the funds invested.  The employer is the sole funder of the plan and will make contributions based on the goal of having 100% salary reimbursement at retirement age.

Traditional Defined Benefit Plans

Each year and an enrolled actuary calculates and certifies the employers required amount that has to be contributed to the participants to meet the IRS’s minimum funding standards.  The IRS allows a range of acceptable contributions so that during times when the business is doing well they are able to fund a higher amounts and during certain times that the business is lean to reduce that amount still while meeting your retirement goals. 

One of the larger differences between a Defined Benefit Plan and a Defined Contribution Plan is that the employer is responsible for the risk involved when it comes to the return of investment. (In the form of higher or lower contributions) Another benefit of a Defined Contribution plan is that the contributions are allowed to exceed the annual IRS limits that a normal 401(k) plan Provides ($53,000 for the 2015 Plan Year) The Defined Benefit plan is only limited by the amount of retirement benefits that it can fund. This results in many situations that the tax deductions and contributions funding an individuals’ retirement account could possibly be $150,000 or higher.

Cash Balance Plans

A cash balance pension plan is a pension plan under which an employer credits a participant's account with a set percentage of his or her yearly compensation plus interest charges. A cash balance pension plan is a defined benefits plan. As such, the plan's funding limits, funding requirements and investment risk are based on defined-benefit requirements: as changes in the portfolio do not affect the final benefits to be received by the participant upon retirement or termination, the company solely bears all ownership of profits and losses in the portfolio.

Although the cash balance pension plan is a defined-benefit plan, unlike the regular defined-benefit plan, the cash balance plan is maintained on an individual account basis, much like a defined-contribution plan. The cash balance plan acts similar to a defined contribution plan also because changes in the value of the participant's portfolio does not affect the yearly contribution. The benefit of a cash balance plan is that the employer is able to save much more for retirement than with a 401(k) alone. And because it is a pension plan, the contributions for an employee can be much higher than they would be in a Profit Sharing Plan.

Overfunded Defined Benefit Plans

Note that all of the plans described above are subject to complex IRS and DOL requirements regarding annual reporting and disclosures to the government, nondiscrimination, coverage, employee notification, Rules and regulations and Plan Document maintenance. In order to receive the enormous benefits and tax advantages provided by these types of retirement plans, it is crucial that you find a consulting firm that has the experience and expertise to make sure you avoid the many possible regulatory pitfalls. Alpha Retirement Plan Consultants, with their onsite CPA and experienced analysts who understand the rules to help you keep your plan operating in a way that continues to meet your objectives, while limiting risk.

No matter what type of plan your business offers we will work with you in all aspects to determine the right approach to design, funding, investing, governing, and employee engagement. We take into account every facet of your business and your goals for benefit adequacy, competitiveness and cost management.


 “We help our clients navigate the maze of available options, without crushing them under details.”