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Plan Types
Retirement Alliance has the knowledge and experience to assist your selection
of the correct plan to meet your retirement and business goals.
Retirement plans are categorized as either Defined Contribution plans or Defined
Benefit plans. Defined Contribution plans are funded by employee and employer
deferred dollars. Deposits to the plan are based on a percentage of employee
compensation (typically between 0-15%). Participants' retirement benefits are
based on the amount of the contributions and the investments' performance.
Defined Benefit plan contributions are based on actuarial factors, compensation,
age and years of service for each employee. Benefits are defined as a percentage
of compensation to be provided for life after retirement age is reached.
Retirement Alliance's team of professionals will assist you in determining
the right plan for your needs. The following discusses the characteristics,
advantages, disadvantages and candidates for the most common types of qualified
retirement plans.
The Benefits to Employers:
- Matching and discretionary contributions are tax deductible.
- Increased employee retention through vesting.
- Employees sense of future security increases productivity.
- Loan provisions relieve employers of involvement in employees financial
hardships.
- 401(k) Plans are second only to medical insurance as a requested employee
benefit.
- Better benefit packages enable companies to compete for highly qualified
employees.
The Benefits to Employees:
- Tax-deferred savings.
- Interest accumulates tax-deferred.
- Monies are protected from business and personal creditors.
- Loans from account balance, with no liability, provided the repayment schedule
is met.
- Payroll deduction makes savings automatic.
- Entry into financial markets without minimum account balance requirements.
For additional information and frequently asked questions about 401(k) plans
refer the the FAQs in the Participant and Plan Sponsor Resource Centers.
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Characteristics:
- Flexible contribution of 0-15% of eligible payroll.
- Participant is vested normally over a 6 yr. period.
- The Plan is only dealt with one time a year.
Advantages:
- Ease of administration
- Corporate tax shelter
- Many different formulas to allocate contribution
- Contribution is elective
- Contribution can be made after close of fiscal year
- Vesting rewards employees for length of service
- Trust is invincible to creditors
- Loans available if company is a "C" Corporation - restricted,
if not
Disadvantages:
- Since contributions are optional, retirement benefit may not be that large.
- No way for employees to contribute toward their retirements.
Candidates:
- Small companies with highly compensated older key employees
- Companies seeking flexibility of contribution to the Plan
- Key employees looking for security of contributions
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Characteristics
- Contribution is mandatory and set in advance by the employer
- Contribution is a specified percent of compensation (1% to 25%).
- Normally these plans are combined with Profit Sharing Plans to allow key
employees to reach their 415 limit (25% of pay or $30,000)
Advantages
- Client knows their mandatory contribution in advance each year. Not determined
by profits or how the assets in the plan performed.
- Contribution not due until the company tax return is due plus extensions.
- Loans available if company is a "C" corporation - restricted,
if not.
Disadvantages
- Mandatory contribution
- Employees normally all receive the same percent of pay contribution
Candidates
- Companies that have a Profit Sharing or 401(k) Plan that want their key
employees to maximize the 415 limits and are not under the existing Plan.
- Companies that want a set contribution amount each year and ease of administration.
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Characteristics:
- A benefit plan similar to a profit sharing plan but designed primarily to
invest in stock of the employer.
- Employer may make tax-deductible contributions to an ESOP in either cash
or in shares of company stock. The later is a Stock Bonus Plan ESOP.
- Loan terms are usually designed to permit the loan payments to fit within
the 25% of covered payroll deduction limitation.
- Participants will vest in their account balances in a similar manner to
the vesting that occurs in a profit sharing plan.
Advantages:
- Employer can create a market for the sale of the company's stock by using
bank financial or promissory notes to sell the shares to an ESOP. This is
a leveraged ESOP.
- Can be used to retire a senior shareholder.
- Repurchase the interest of a dissenting shareholder.
- Purchase stock from the estate of a deceased shareholder.
- Issue new shares of stock to raise tax-favored financing.
- Selling shareholders may reinvest the proceeds, tax deferred, in qualified
replacement property.
Disadvantages:
- Company shares must be professionally appraised.
- ESOP must be independently represented by its own financial advisor.
- ESOP must be independently represented by legal counsel separate from the
corporation.
- Available only to "C" Corporations.
Candidates:
- Company looking to sell the business to employees.
- Larger publicly held corporations looking to have their employees own stock.
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Characteristics:
- Mandatory contributions by employer on an annual or initial basis.
- Formula guarantees a retirement benefit.
- Benefit is insured by PBGC
Advantages:
- No limit on contributions up to 100% of salary
- Ideal for older key employee who has not saved for retirement and wants
to put as much money as possible away in the shortest amount of time.
- Also ideal for sheltering a second source of recurring income such as director
fees, royalties, etc.
- Plan can be terminated when key employee retires.
Disadvantages:
- Mandatory Contributions
- PBGC insurance is $21.00/ee
- Expensive Plan for midsize and larger firms
Candidates:
- Smaller companies with one or two key older (50+) employees who want to
put away over $30,000/yr and shelter these contributions from taxes.
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