Plan Types and Contributions
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Defined Benefit:

  • Defined Benefit plans are built around a model - Normal Retirement Date (which can be 62 to 65), 2 year eligibility and 100% vesting, and a formula for a monthly pension to be paid at retirement
  • The way the plan is used is to generate significant contributions for the owners; at any time, the owners can get access to the money, either by terminating the plan, or by distributing their interest to another plan or IRA; if the money is left in the DB plan, the owners can elect from a variety of distribution methods
  •  Contribution limits can be from zero to a maximum of $65,000 at age 40, going up to $250,000 at age 62, for plan years beginning 1/1/2012 – these are illustrations; it is possible to reward certain groups of employees, and certain employees can be excluded; changing the benefits requires early planning
  • If the plan is properly designed, the annual minimum contribution should be either zero or a low number; however, if the assets decline quite a bit, the employer may have to put in money to bring the plan assets back up
  • Defined Benefit plans are the most popular and useful plan for a highly profitable small business; Defined Benefit plans provide the largest range of contributions. Defined Benefit plans require an actuary, and you will get the best results if you deal with an actuary directly.

Defined Contribution – Profit Sharing, Frozen Money Purchase:

  • 2 year eligibility and 100% vesting; employer chooses annual contribution, and usually we have each employee in their own allocation classification
  • Plan is used to generate significant contributions for the owners
  • Company contributions are allocated by participant – maximum allocation for any one person is the lesser of $49,000 or 25% of Compensation – it is common to see an allocation of 25% for an owner, and 7% for other participants
  • Can reward certain employees, and certain employees can be excluded
  • Very popular plan for a business with 10 or more employees, and is also used by employers with less than 10 by itself or as a second plan with a Defined Benefit

Defined Contribution - 401k Plan:

  • Contributions are: 1) employee deferrals by payroll deduction, which an employee chooses to make out of his/her salary, 2) immediate matching contributions by the company (which can be a Safe Harbor format, or not), and 3) sometimes annual employer discretionary contributions (like an employer contribution for a Profit Sharing Plan)
  • Each participant has their own separate investment account, and can change investments within a broad range of choices
  •  Employee deferrals and matching are sent to the investment program immediately
  •  participants pay the bulk or all of the fees for the 401k plan
  • Very popular plan for a business with more employees (15 or more, but anyone can have it), and is also used by employers with less than 10 employees either by itself or as a second plan with a Defined Benefit Plan

It is very common to have employee deferrals for working spouse of the owner and working children of the owner in 401k plans.

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