Which Qualified Retirement Plan Is The Best Fit?
A qualified plan must meet a certain number of requirements as set forth in the Internal Revenue Code such as minimum coverage, participation, vesting and funding requirements. Whether you are a sole proprietor, partnership, LLC, LLP or a corporation, there are several types of qualified retirement plans that can meet your needs. A retirement plan can serve many purposes, from tax sheltering income to attracting and retaining employees.
We have used the services of California Retirement Plans for over 20 years. We have been very pleased by the prompt and professional manner with which they handle our actuarial services. We also appreciate how they keep us advised of changes in the law and suggesting means by which we could maintain compliance.Grant Hunt, President - Grant J Hunt Company (client since 1996)
- Employer contributions are typically discretionary each year.
- Employer contributions are limited to 25% of eligible compensation (typically much lower limits than a DB Plan).
- Participant assets are typically invested in individual accounts with daily valuation.
- Participants typically bare the investment risk.
- Employer and employee (pre-tax and Roth) contributions are allowed.
- Annual employer contributions are required.
- Employer contributions are limited by the plan's retirement benefit based on age and salary (typically much higher limits than a DC Plan).
- Participant assets are invested in a pooled account with an annual valuation.
- Plan Sponsor bares the investment risk.
- Employer contributions only.
- Generally the most flexible plan design.
- Discretionary employer contributions, within IRS limits.
- Tax deduction on employer contributions up to 25% of aggregate, eligible participant compensation.
- Contribution formulas can be based on compensation , resulting in larger contributions for owners and/or management.
- Contributions are not taxed until distributed to the participants.
- Most popular plan type today (higher value perception by employees).
- Allows participants to invest in their own retirement and not rely solely on employer contributions and social security.
- Allows for Roth and/or pre-tax contributions up to $19,500 for 2021.
- Participants age 50 and older can defer an additional “catch-up” contribution of $6,500 for 2021.
- Can be combined with an employer match to encourage participation.
- Can be combined with a profit sharing contribution.
- Safe Harbor plans automatically satisfy the annual ADP test.
- The Safe Harbor contribution is a fixed, 100% vested employer contribution for each eligible plan participant.
- The contribution is typically either a 3% non-elective or 4% match contribution.
- This provision allows Highly Compensated Employees (including owners, partners, etc.) to defer up to the annual limit ($19,500 in 2021) without concern for how much the Non-Highly Compensated Employees defer.
- Discretionary employer contributions are tested based on the projected benefit at retirement, rather than the current value of the amount funded.
- Can be designed to give individual participants different contribution amounts.
- This design is typically used by small businesses seeking to maximize contributions to the owners, while minimizing the employee cost.
- Uses a specific formula to determine a fixed monthly benefit at retirement.
- Maximum benefit allowable is 100% of compensation, based on the highest consecutive 3-year average.
- A mandatory minimum employer contribution is calculated annually in order to ensure the plan is sufficiently funded to pay the participants’ accrued benefits.
- Can be difficult for participants to understand their benefits.
- Typically higher annual required contributions for older, non-owner, employees.
- A Defined Benefit plan that resembles a Defined Contribution plan.
- Benefit is expressed as a current account balance rather than a monthly payment at retirement.
- Plan participants receive an annual credit to their hypothetical account balance along with a fixed, guaranteed, interest rate (usually 3%-5%).
- Tends to be much easier for participants and employees to understand.
- Typically lower annual required contributions for older, non-owner, employees.
Annual Plan Limits
Each year the U.S. government adjusts the limits for qualified plans and Social Security to reflect cost-of-living adjustments and changes in the law. Many of these limits are based on the “plan year” as defined in the plan document. The elective deferral and catch-up limits are always based on the calendar year.