America’s 401(k) can assist you in determining the right retirement plan to fit your organization. There are many plan types to select from and each should be reviewed and measured against your retirement goals. There are two major categories of plans:

Plan Types - Defined Contribution

401(k)

A 401(k) Plan is a qualified plan that allows a participant to defer a portion of their salary into the plan rather than taking the cash. The benefit to the participant of this deferral is the ability to not pay income tax on the deferral until the participant takes a distribution from the plan.

The employer can contribute a matching contribution within a 401(k) plan. A matching contribution is allocated to each participant that makes a deferral into the plan based upon the matching contribution formula. This formula can be stated in the plan document or can be discretionary each plan year.

Both the deferral contributions and the matching contributions are subject to discrimination tests. These discrimination tests are performed annually after the close of the plan year.

Safe Harbor 401(k)

An employer can elect to have a 'safe harbor' contribution within a 401(k) plan. This safe harbor contribution allows the plan to automatically pass the 401(k) discrimination test (Average Deferral Percentage Test) and/or the 401(m) discrimination test (Average Contribution Percentage Test) which are required annually.

There are two different kinds of safe harbor contributions. The employer must elect one type annually. The two different kinds are:

All safe harbor contributions are 100% vested and subject to specific distribution requirements and prohibitions. Generally, safe harbor plans require a notice 30 days in advance of the year the plan will be safe harbor.

403(b)

A 403(b) Plan is a qualified plan that is put in place for the benefit of a non-profit organization. It is like a 401(k) plan in that each eligible participant can elect to defer a portion of their salary into the plan rather than taking it in cash. This deferral is contributed to the plan on a pre-income-tax basis.

The employer has the option of contributing a matching contribution to the plan. A matching contribution is an employer contribution allocated to each eligible participant that defers into the plan based upon a formula. This formula can be defined in the document or can be discretionary each year.

Generally, 403(b) deferrals are not subject to any discrimination tests but any employer contributions such as a matching contribution may be subject to a discrimination test annually.

Another distinguishing distinction between the 401(k) plan and the 403(b) plan is that the investment vehicle that can be used in a 403(b) plan is limited to either individual annuity contracts or mutual funds held in custody by a qualified trustee (i.e. Trust Company, etc.).

457

A 457 Plan is a qualified plan that is put in place for the benefit of certain governmental agencies and non-profit organizations. It is like a 401(k) plan in that each eligible participant can elect to defer a portion of their salary into the plan rather than taking it in cash. This deferral is contributed to the plan on a pre-income-tax basis.

The employer has the option of contributing a matching contribution to the plan. A matching contribution is an employer contribution allocated to each eligible participant that defers into the plan based upon a formula. This formula can be defined in the document or can be discretionary each year.

In a 457 plan, the deferrals are not subject to any discrimination tests but any employer contributions such as a matching contribution may be subject to a discrimination test annually.

Profit Sharing

A Profit Sharing Plan is a qualified plan that allows the employer to make contributions to eligible participants based upon a set formula within the plan document. The amount of the contribution is discretionary each year. Traditional profit sharing plans allocate the contribution based upon salary and each participant receives the same percent of annual salary. Despite the name, the contributions in a profit sharing plan are not usually tied to profit.

Class-allocated/Comparability

Class-allocated/Comparability refers to a Profit Sharing Plan with a specific type of formula for allocating employer contributions to eligible participants. These formulas are based upon classes of employees. Each class of employee must be defined in the plan document and the formula for each class must also be defined in the plan document. The amount allocated to each class can be discretionary subject to the 401(a)(4) general discrimination test more commonly known as the comparability test. This test, very simplified, takes the current contribution for each participant, projects it forward to normal retirement age, and decides if the benefits are 'comparable' at normal retirement age for each participant.

This type of plan is best used by an employer that would like to give different benefits to different classes of employees. For example, an employer who would like to maximize the benefits given to the owners and upper management while minimizing the cost to all other employees might benefit from this type of plan. Two key factors in designing this plan are age and salaries of all participants. If there are large discrepancies between age and salaries of the owners/management as compared to all other employees, (i.e. the owner/management group is older and has larger salaries than other employees), then this type of plan may be recommended. However, if the owner/management group is younger and or same age as all other employees, the plan may have trouble passing the comparability test and therefore this plan design would not be recommended.

This plan design has become very popular with small, professional organizations such as attorney and engineering firms. The comparability test is taken annually by the plan and must pass every year.

PLAN TYPES - defined benefit

A Defined Benefit Plan is a qualified plan where the contribution to eligible participants is based upon a sum of money accumulating in the plan to pay benefits at normal retirement age. Using actuarial assumptions, as well as the definition of the benefit at normal retirement age defined in the plan document, the benefit at normal retirement age is computed and then reduced to the current contribution needed to meet that benefit. This differs from the other types of plans discussed in that the benefit is defined in the document rather than the allocation formula.

A contribution to a defined benefit plan is not discretionary. The employer bears the responsibility of earnings or losses in that if there have been earnings that have exceeded those used in the actuarial assumptions the annual contribution amount may be reduced and if there are losses the annual contribution amount may be increased.

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