Types of retirement plans
Qualified retirement plans are one of the largest sources of tax deductions in the United States. Contributions are tax deductible for the employer, investment earnings are tax free, and employees don’t pay tax until they receive the benefits. In return for these tax advantages, the plan must comply with IRS coverage, nondiscrimination, vesting and other requirements.
Nonqualified plans don’t enjoy the tax advantages of qualified plans, but they don’t have to comply with all the IRS requirements. They can be very effective when properly designed.
Retiree medical plans and other post-employment benefits (OPEB’s) continue health and other benefit coverages for retirees. Take a quick look at the issues for private and government employers here. You can follow current retiree health topics on the OPEB section of our retirement plan blog, or find GASB 45 basics, FAQ’s and resources for public-sector employers at our GASB 45 / OPEB info site.
Two types of qualified plans: defined benefit and defined contribution
A defined benefit (DB) plan is a qualified plan that defines the benefits it will pay. It is the most efficient vehicle for providing retirement benefits – but it’s not for every employer. It’s a good solution for employers who:
- want to ensure that owners and employees can afford to retire, or
- want tax deductions higher than $50,000 for owners or other employees.
A defined contribution (DC) plan is a qualified plan that defines the contributions put into it. It’s easy to understand because every employee has an individual account. It’s a good solution for employers who:
- want to attract and reward a mobile workforce, or
- want to maximize control over the cost of the plan.
Some common DC plan types are 401(k) plans, 403(b) plans (for certain nonprofits), profit sharing plans with discretionary employer contributions, and “money purchase” plans with fixed employer contributions.
Profit sharing and money purchase plan designs can be pre-approved by the IRS, or cross-tested plans that meet the employer’s objectives while still complying with IRS rules.
You can follow current defined contribution plan topics on the DC section of our retirement plan blog.
For more information on specific plan types, click the links below:
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