Analysis of Alternatives

In order to choose a plan design that meets an employer's objectives, it is best to have an overview of the different qualified retirement plans available. To that end, the following are descriptions of the different types of plans that Advantage Benefits maintains. For another perspective of the different plans, the Employee Benefits Security Administration (EBSA), in connection with the U.S. Department of Labor (DOL), has published a table of information on retirement plans.

The most popular of the retirement plans as they allow for eligible employees to contribute pre-tax dollars through payroll deduction. A 401(k) plan may offer a Roth 401(k) feature, as well. Under the Roth 401(k), payroll deductions are after-tax. This type of plan also allows an employer to make matching and/or profit sharing contributions on an employee's behalf. In addition, provisions for loans, Hardship withdrawals, rollover and after-tax contributions can be included in the plan design. The balances in this type of plan are generally invested by participant direction in a variety of mutual funds, however the options can also include publicly traded stocks, company stock and a Trustee Investment Directed Account. Total contributions for each Employee (combined Employee and Employer) are limited to the lesser of 25% of total recognized compensation or $58,000 per year for 2021 (excluding "Catch-Up" contributions for participants age 50 or older). Overall Employer deductions under a 401(k) Plan are limited to 25% of total covered payroll.

 

 

Allow an employer to contribute an amount on the behalf of all eligible employees, the level of which is determined each year on a discretionary basis. The allocation to each employee can be calculated in a variety of different ways based upon the needs and objectives of the employer. In addition, provisions for loans, Hardship withdrawals, and rollover contributions can be included in the plan design. The balances in this type of plan are generally invested in a Trusteed account, but the plan can be designed to allow for participant direction in a variety of mutual funds, stocks, or bonds. Contributions on the behalf of the employer are limited to the lesser of 25% of total recognized compensation or $58,000 per year for 2021.

 

Profit Sharing Plans
401(k) Plans
Money Purchase Plans

Allow an employer to contribute an amount on the behalf of all eligible employees, the level of which is usually set as a fixed percentage of eligible compensation. In addition, provisions for loans and rollover contributions can be included in the plan design. The balances in this type of plan are generally invested in a Trustee Investment Directed Account, but the Plan can be designed to allow for participant direction in a variety of mutual funds, stocks, or bonds. Contributions on the behalf of the Employer are limited to the lesser of 25% of total recognized compensation or $58,000 per year for 2021.

Defined Benefit Plans

Provide a specified amount of monthly retirement income based on a formula set forth within the plan. Employer contributions to fund these benefits are based on actuarial calculations which recognize an employee's age, length of service with the employer, the formula determined benefit, and anticipated investment, mortality, and turnover results. Contributions become a fixed commitment and are required each year as long as the plan remains in effect. There are no limitations on the amount which can be contributed, as long as that amount is required to provide for the predetermined benefits and that amount does not exceed a "full funding limitation" as defined under IRC Regulations. There is, however, a maximum on the benefits for which a Plan can be funded, which is currently 100% of the average of the highest three years' compensation of each participant, up to a maximum benefit of $230,000 per year for the 2021 plan year (subject to cost of living increases). However, with the introduction of age-weighted and "new comparability" cross-tested allocation formulas under discretionary Profit Sharing Plans, employers have most recently preferred the discretionary Profit Sharing Plan.

Cash Balance Plans

Allow an employer to contribute an amount on the behalf of all eligible employees based upon a pre-determined benefit formula at normal retirement age. The Plan is somewhat of a hybrid of a Defined Benefit Pension Plan and CrossTested Profit Sharing Plan, combining the high contribution amounts of a Defined Benefit Plan with some of the flexibility and the portability of a 401(k) Profit Sharing Plan.