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 Employer-sponsored retirement plans come in the two types - defined benefit plans and defined contribution plans. This overview explains both types and outlines the specific kinds 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 - 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 100% of compensation or $45,000 in 2007. [ top ]
 Money Purchase Plan - Employer contributions are fixed and not based on profits. Employer may contribute an amount not to exceed the lesser of 100% of compensation or $45,000 in 2007. [ top ]
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. [ top ]
SIMPLE IRA - Savings Incentive Match Plan for Employees ("SIMPLE" plan) can only be established by employers that have 100 or fewer employees who receive at least $5,000 in compensation during the preceding 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 100% of pay or $10,500 plus catch-up contribution, and (2) the employer contribution that is made either as a "matching contribution" or a "nonelective contribution."
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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. [ top ]
401(k) Plan - Elective deferrals by employees are limited to $15,500 for 2007. Employees who will be age 50 or older by the end of the tax year can contribute an additional $5,000 for 2007 to a 401(k) plan. Employer's matching contributions are not treated as part of the employee's elective contributions. Nondiscrimination and top-heavy testing are required. [ top ]
SEP-IRA - Simplified Employee Pensions (SEP) are established for employers to make contributions to IRAs of the employee. For 2007, annual contribution by the employer can not exceed the lesser of (1) 25% of employee's compensation ($225,000 maximum compensation), or (2) $45,000. 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. [ top ]
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 can not be more than the lesser of: (1) $45,000 or (2) 100% of the employee's compensation. The annual contribution is made up of the following:
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| Updated 9/25/2007 |
