A "401(k)" is a retirement plan that allows employees
to contribute a percentage of salary on a tax-deferred
basis. The employer may choose to match the employee's
contribution or to make a profit sharing contribution in
a profitable year. The "401(k)" plan has become one of
the most popular plans ever because it allows for both
the employees and the employer to contribute money and
save on taxes at the same time.
Profit Sharing Plans/ESOP Plans
A Profit Sharing Plan is a retirement plan that allows
the employer to contribute a tax deductible
discretionary amount of money each year on behalf of all
eligible employees. These contributions are usually
allocated to the employees on a pro rata basis depending
on their amount of salary. Many employers prefer this
type of flexible plan because they are not required to
contribute a fixed amount. Employee Stock Ownership Plans
(ESOPs) are Profit Sharing Plans that can invest in
employer stock.
Money Purchase Pension Plans
A Money Purchase Pension Plan requires employer
contributions equal to a fixed percentage of each
eligible employees compensation up to 25% pay.
Money Purchase Pension Plans allow for a
larger contribution than most other plans;
however, the employer is obligated to make
a contribution each year.
Defined Benefit Plans/Cash Balance Plans
A Defined Benefit Plan contains a formula for providing
each participant with a specific retirement benefit.
This type of retirement plan usually requires the
employer to make a contribution each year. The amount
of contribution is actuarially calculated by taking into
consideration salary, length of service, age of
employee, and the performance of plan assets. A Defined
Benefit Plan is particularly popular because it provides
employees with a more accurate projection of their
retirement benefit.
Target Benefit Plans
Target Benefit Plans utilize the concepts of both
Defined Benefit and Money Purchase Plans. A Defined
Benefit formula is used to determine an employee's
projected pension at retirement. Unlike the Defined
Benefit Plan, the contributions to this plan are limited
to 25% of an employee's salary.
403(b) Tax-Sheltered Annuity
A "403(b)" or Tax-Sheltered annuity is a vehicle for
deferring compensation for employees of public schools
and non-profit organizations. These plans are similar
to 401(k) plans since they allow for employee tax
deferred contributions and employer matching
contributions.
