Types of Plans Available

The tax benefits of qualified retirement plans are available to any type of small business, whether it’s a C corporation, S Corporation, sole proprietorship, LLC, or partnership. And there is no requirement that the business be a full-time operation. Individuals who earn self-employment income on a “moonlighting” basis may sponsor qualified plans to shelter some or all of that income.

There are several tax benefits associated with qualified retirement plans. First, contributions made to the plan are fully tax deductible. Second, the investment earnings on qualified retirement plan monies are exempt from income tax. Finally, when benefits are ultimately distributed from the plan, they are eligible for certain tax-favored treatment, such as rollover to an IRA.

At Select Pension Services, clients may choose from among several types of qualified retirement plans. The pros and cons of each type of plan are discussed in the sections to the right.

Defined benefit plans offer one huge advantage for participants who are beyond the age of 40 or so. Under the right circumstances, a defined benefit plan can generate much higher deductible contributions than any other type of retirement plan. For an older participant, it is not unusual to obtain annual deductions well over $100,000.

Defined benefit plans are somewhat more complex to design and administer than are defined contribution plans, and the services of an Enrolled Actuary are required. Fortunately, Select Pension Services has two full-time Enrolled Actuaries on staff, and their services are included in our fixed fees.

For the older participant who wants to maximize annual deductions, a defined benefit plan is usually a good choice.

Profit sharing plans offer maximum flexibility with respect to the annual contribution level, but contributions are limited to 25% of covered payroll. Where the 25% limitation isn’t a problem, a profit sharing plan is a good choice for most employers. They are simple, easy to understand and explain to employees, and the employer has total flexibility as to how much to contribute each year.

A profit sharing plan is a “defined contribution” type of plan. Employer contributions and investment earnings are allocated annually among the individual accounts of plan participants. When a participant terminates employment or retires, his/her benefit is equal to the accumulated balance in his/her individual account.

A recent development is the “age weighted” or “new comparability” profit sharing plan. These plans can effectively skew contributions toward the business owner, provided that the owner is significantly older than some of his/her employees.

A 401(k) plan is a specific type of profit sharing plan, which allows each participant to electively contribute some of his/her salary to the plan on a pre-tax basis, to supplement the profit sharing contributions made by the employer. 401(k) plans are very flexible and very popular among employees, but they do require more work by the employer to ensure that “salary deferral” contributions are properly withheld from paychecks and promptly remitted to the correct investment accounts.

401(k) plans are frequently used in combination with defined benefit plans, to provide for additional tax-deductible contributions.

Cash balance plans are considered to be “defined benefit plans”, but they look very much like defined contribution plans. Each participant has a cash balance account, to which is added annual contribution credits and interest. At retirement, the accumulated account balance is made available to the participant as a lump sum benefit.

Cash balance plans are usually used in combination with profit sharing or 401(k) plans. The combination of the two plans provides for (a) contributions for the business owner that are much higher than would be available with a single plan, and (b) maximum skewing of contributions and benefits toward the business owner.

We pride ourselves in helping clients achieve their retirement and tax deduction objectives. We will use whichever type of plan (or combination of plans) that is best for each individual client. For more information about plan types, or to find out what might work for you, please visit our Contact Us page or use the contact information at the bottom of this page.