Pension Services Corporation specializes in the design, administration, document preparation, and compliance/government reporting for the following tax qualified retirement plans:
1357 Kapiolani Blvd., Suite 1111 ● Honolulu ● Hawaii ● 96814 ● Tel (808) 946-0355 ● Fax (808) 946-0520
Many employers elect to adopt a profit sharing plan as part of a comprehensive employee benefits package. Profit sharing plans also offer excellent tax benefits for a business and its employees. This type of plan is funded solely by the employer; employees are not allowed to make contributions to this plan.
Profit sharing plans are popular because of the flexibility and discretion that the employer has over the amount contributed each year (0-25% of eligible compensation). Within the realm of profit sharing plans, there are various types of designs that can be utilized to meet the goals of the employer:
· Age Based/Weighted
· Class Based/Comparability
· Integrated
· Non-Integrated
The 401(k) plan is the country's most popular and widely offered qualified retirement plan. A 401(k) plan is a profit sharing plan that contains a cash-or-deferred salary arrangement (CODA) option.
Many employers add this provision to their profit sharing plan to encourage employees to save for retirement by making pre-tax deferrals from their salary to the plan. Since it is contributed on a pre-tax basis, these salary deferrals reduce the taxable income of the employee for federal and state income tax purposes. There are various types of 401(k) plan designs available:
· Traditional 401(k)
· Safe Harbor 401(k)
· Roth 401(k)
· Solo 401(k)/Individual(k)
While 401(k) plans are very popular, there are times when a defined benefit pension plan may be appropriate. This is an employer sponsored retirement plan that promises to pay a certain benefit at a future retirement age, as determined by a specific formula. In general, employees do not contribute to this type of plan.
In a defined benefit plan, the contribution is not allocated each year in the form of a current deposit into one's individual account. Instead, the benefit is calculated based on a participant's age, salary history, and years of service. A portion of the benefit is then earned each year.
A money purchase pension plan is similar to a profit sharing plan except the contributions are mandatory and are based on a specific formula written into the Plan document. Due to the required contributions, a Money Purchase Pension Plan may be able to grow larger account balances than other types of similar arrangements. If the minimum contributions are not met, an excise tax may be assessed as a penalty.
A significant advantage that a defined benefit plan boasts is employers can generally contribute, and therefore deduct more to this plan than other types of plans.
Although this type of plan has many beneficial features, it is important to be aware that since the employer promises to pay a certain benefit at retirement, the employer assumes the investment risk. Therefore, if the plan assets earn less than expected, the employer will have to make a larger contribution to ensure the plan has sufficient monies to pay the promised benefits. Should the plan's investments earn more than anticipated, the employer's costs will decrease.
A decision to use a defined benefit plan as the preferred retirement plan depends upon the goals and objective of the employer.