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The Plan Sponsor’s Guide to Common Retirement Plan Designs

retirement plan designs

Common Retirement Plan Designs

Traditional 401(k) Plan Designs
A traditional 401(k) plan design is a defined contribution plan that allows participating employees to make pretax contributions to their company’s retirement plan. There are several types of 401(k) plan designs such as safe harbor 401(k)s and SIMPLE 401(k)s, which are differentiated by specific features and requirements within the 401(k) plan specifications. Contributions to a 401(k) plan can be made by the employer (either matching and/or profit sharing contributions) and/or individual employees. A 401(k) plan can benefit a business that wants to provide a valuable employee retention benefit, gain tax advantages and meet the retirement goals of the business owners or key executives. 401k plans are subject to annual testing to be certain that highly compensated employees are not participating in the plan in excess of the allowable level when compared to non-highly compensated employees. This annual test can be waived if the employer is making ‘safe harbor’ contributions.

403(b) Tax-Sheltered Annuity Plan
A 403(b) plan (tax-sheltered annuity plan or TSA) is similar in design to a 401(k) plan, but this type of retirement plan is generally offered by public schools, colleges, universities, churches and 501(c)(3) organizations. In either a 401(k) plan or a 403(b) plan, the employee can defer some of their salary (pretax) up to the annual IRS limit. Contributions to a 403(b) plan can be made by the employer and/or individual employees in the same manner as 401(k) plans above.

 Profit-Sharing Plan
A profit-sharing plan accepts discretionary employer contributions. This option may be suited for an employer that wants to have an option for flexible contributions, especially if cash flow is a concern. Profit sharing plans are also recommended for business owners that are looking to maximize their contributions. A company with a profit-sharing plan can also have other retirement plans. There is no minimum required contribution, so an employer can make a contribution in a year that he can afford to do so, and otherwise not make a contribution. A 401(k) salary deferral feature can be added to a profit-sharing plan.

If the employer makes a contribution, contributions are divided based on provisions in the plan document. Profit sharing designs are subject to testing to ensure that the plan doesn’t unfairly benefit highly compensated employees and company owners over non-highly compensated employees. Contribution provisions in the plan document can include designs, commonly called new comparability or age weighted, that allow for different levels of contributions to different employees thus allowing the employer to make greater contributions to, for example, owners, key employees, older employees, etc. subject to annual testing.

 Defined Benefit
A defined benefit plan generally provides a specific benefit at retirement for each eligible employee, whereas a defined contribution specifies the contributions made by an employer towards an employee’s retirement account (and the retirement benefits will depend on the contributions as well as gains or losses on the account over time). Businesses can generally contribute more for a defined benefit plan than a defined contribution plan. Benefits are often calculated factoring an employee’s age, years of service, and salary. They are also typically insured by the Pension Benefit Guaranty Corporation (PBGC).

 Cash-Balance
A cash balance plan is a defined benefit plan, which defines a “pay credit” and an “interest credit” for each participant, which can be fixed or linked to a variable rate. When a participant becomes entitled to his or her benefit in a defined benefit and/or cash balance plan, a participant may have the option to collect the benefit via annuity-type payments based upon his or her account balance, or as a lump-sum payment.

 Money Purchase
A money purchase plan requires set annual employer contributions to plan participants. The retirement benefit is based on the contributions to the participant’s account and gains or losses over time. When a participant becomes entitled to his or her benefit, a participant may have the option to collect the benefit via annuity-type payments based upon his or her account balance, or as a lump-sum payment. Money purchase plans are generally out of favor since 2002 as the same benefits can be realized in a profit sharing plan without setting a fixed employer contribution formula.

 409A Nonqualified Deferred Compensation Plans (NQDC)
In a nonqualified, deferred compensation plan, an employee consents to receive a withheld portion of salary as payments at a later point in time. The payments made by the employer are not currently tax-deductible but deductible when distributed to the employee at a later date. Plans are not limited to caps imposed on “qualified” (ERISA compliant) defined contribution or defined benefit plans. Qualified and nonqualified plans are differentiated by eligibility, deferral limits, distribution timing, asset security and other key features. A nonqualified plan must comply with Section 409a of the Internal Revenue Code.

 457 Plans
A 457 plan is a nonqualified, deferred compensation retirement plan available to state and local government and tax-exempt employers as defined under Section 457 of the Internal Revenue Code. The employer can offer the plan to employees, and the employees can defer compensation into the plan on a pre-tax basis. A 457 plan is similar to a 401(k) or 403(b) plan, but it has unique catch-up contribution and withdrawal features. The two primary types of 457 plans are governmental and non-governmental plans.

If you are interested in learning about the benefits of employer sponsored retirement plans or would like to discuss the benefits of specific plan designs, you can speak with a retirement plan consultant or financial advisor for guidance.

RPG Consultants

RPG Consultants

RPG Consultants is a Center for Fiduciary Excellence (CEFEX) - Certified Recordkeeper and Third Party Administrator (TPA). We offer full-service retirement planning with an emphasis on defined benefit, defined contribution and 401(k) programs, complex pension strategies (including select comparability designs), non-qualified deferred compensation programs, cafeteria plans and plans covered by the Davis-Bacon Act. We handle the administration service requirements for all the above programs, including daily and quarterly valuation record keeping capabilities and cafeteria plan flexible spending accounts. We also perform Company reviews of other benefit programs to determine if they are designed, operated and funded in the most cost-efficient manner and are in compliance with government regulations. Our fees are completely transparent and reasonable based on any size plan – including start-ups. We offer true-open architecture investment choices of any mutual fund family, ETF and managed strategy - with no revenue sharing. RPG Consultants is a “non-producing” TPA – we do not market or sell investments. We strictly provide value-added consulting, administration and recordkeeping for company benefit plans.

Office Locations:

5 Penn Plaza, 23rd Floor, New York, NY 10001
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181 S. Franklin Ave., Suite 202
Valley Stream, NY 11581

Phone Contact:
212.947.4800
RPG Consultants

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