Employer-Sponsored Retirement Plans*
Employer-sponsored retirement plans come in two types: defined benefit plans and defined contribution plans. The following is an overview of both types with a brief outline of defined contribution plans.
Defined Benefit Plans
A defined benefit plan is a retirement plan sponsored by the employer in which the employer’s annual contributions to the plan are based on actuarial assumptions. The benefits are usually a monthly retirement pension based on the employee’s wage and the number of years with the employer.
Defined Contribution Plans
A defined contribution plan is a retirement plan sponsored by the employer in which a separate account must be set up for each employee covered by the plan. The benefits are based solely on contributions to the account, as well as its investment gains and earnings.
Types of Defined Contribution Plans
- Profit-Sharing Plan
- Money Purchase Plan
- Stock Bonus Plan
- SIMPLE IRA
- SIMPLE 401(k) Plan
- 401(k) Plan
- 403(b) Plan
Profit-Sharing Plan – Contributions are generally computed by applying a contribution formula to employer profits. The level may be made variable and left to the annual discretion of the plan sponsor. Contributions need not be made every year but must be “recurring and substantial.” Employer may contribute an amount not to exceed the lesser of 25% of compensation or $52,000 in 2014. Cost of living adjustments are anticipated for later years.
Money Purchase Plan – Employer contributions are fixed and not based on profits. Employer may contribute an amount not to exceed the lesser of 25% of compensation or $52,000 in 2014. Cost of living adjustments are anticipated for later years.
Stock Bonus Plan – This defined contribution plan must generally follow the same rules as a profit-sharing plan except that distributed benefits usually are in the form of the employer’s stock.
SIMPLE IRA – Savings Incentive Match Plan for Employees (“SIMPLE” plan) can only be established by employers who have 100 or fewer employees who receive at least $5,000 in compensation during any two years preceding the current calendar year. Contributions to the plan are made up of: (1) the employee’s elective contributions that are made under a salary reduction agreement, limited to a maximum of $12,000 in 2014, plus catch-up contribution, and (2) the employer contribution that is made either as a “matching contribution” or a “nonelective contribution.”
- Matching Contribution – Employer must match dollar-for-dollar the first 3% of compensation for each participating employee. Employer may reduce match to 1% in two years of any five-year period.
- Nonelective Contribution – Employer must contribute 2% of compensation for all eligible employees, regardless of whether or not they participate.
- Catch-up Contribution – Employees who will be age 50 or older by the end of the tax year can contribute an additional $2,500 for 2014 to a SIMPLE plan.
SIMPLE 401(k) – This plan involves the same contribution limits and qualifications as the SIMPLE IRA; however, the SIMPLE 401(k) plan does not have the same nondiscrimination and top-heavy testing requirements as a regular 401(k) plan.
401(k) Plan – Elective deferrals by employees are limited to $17,500 for 2014. Employees who will be age 50 or older by the end of the tax year can contribute an additional $5,500 for 2014. Cost of living adjustments are anticipated for later years. Employer’s matching contributions are not treated as part of the employee’s elective contributions. Nondiscrimination and top-heavy testing are required.
SEP-IRA – Simplified Employee Pensions (SEP) are established for employers to make contributions to IRAs of the employee. For 2014, annual contribution by the employer cannot exceed the lesser of 25% of employee’s compensation or $52,000. Plan can be established and employer contributions made by the employer’s tax return filing due date plus extension. Nondiscrimination and top-heavy testing are required.
403(b) Plan – Tax Sheltered Annuity Plan (TSA) is a deferred compensation plan of exempt organizations and public schools. The maximum annual contribution to the 403(b) plan cannot be more than the lesser of: (1) $52,000 or (2) 100% of the employee’s includable compensation for the most recent year of service. The annual contribution is made up of the following:
- Elective deferrals by employees – limited to $17,500 for 2014. Employees who will be age 50 or older by the end of the tax year can contribute an additional $5,500 for 2014.
- Nonelective contributions made by the employer; and
- After-tax contributions made by the employee.
Western & Southern Life does not provide tax or legal advice. Please contact your tax or legal advisor regarding your situation.
*Contribution rates per Internal Revenue Service at www.IRS.gov.