Defined contribution (DC) plans
Profit sharing and money purchase plans can take the form of IRS pre-approved designs, or other designs that meet the employer's objectives while still complying with IRS rules.
Pre-approved methods of allocating employer contributions include:
-
a level percentage of pay for each employee, and
-
an "integrated" plan that takes the employer's FICA taxes into account by allocating an additional contribution for pay above the Social Security wage base.
Many other designs are possible when pre-approved plans aren't good enough. Two examples are shown here:
-
a service-weighted plan that contributes a higher percentage of pay for each year an employee stays with the company, and
-
a two-tiered plan that enables highly paid employees to defer more of their compensation while other employees take most of their compensation in cash.
See plan description above Introduction to defined contribution plans
| |
Age |
Years of Service |
Pay |
Service-Weighted |
Two-Tiered |
| Contribution |
% of Pay |
Contribution |
% of Pay |
| Owner |
55 |
20 |
$225,000 |
$45,000 |
20.0% |
$45,000 |
20.0% |
| Employee |
40 |
10 |
50,000 |
5,000 |
10.0% |
2,500 |
5.0% |
| Employee |
30 |
5 |
30,000 |
1,500 |
5.0% |
1,500 |
5.0% |
|
Total |
|
|
$305,000 |
$51,500 |
16.9% |
$49,000 |
16.1% |
Service-Weighted plan allocates 1% of pay per year of service. Two-Tiered plan allocates 20% of pay for owner, 5% for employees.
Defined Benefit plan
