Types of retirement plans
Qualified retirement plans are the largest source of tax deductions in the United States - even larger than home mortgage interest! 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 all 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 continue health and other benefit coverages for retirees. Take a quick look at the issues for private and government employers here.
Two types of qualified plans: defined benefit and defined contribution
A defined benefit 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:
They come in many forms: traditional plans and hybrid plans like cash balance.
Read our article on cash balance plans published in Employee Benefits Planner magazine.
A defined contribution 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:
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want to attract and reward a mobile workforce, or
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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 and higher deduction limits.
Profit sharing and money purchase plans can be designs pre-approved by the IRS, or other designs that meet the employer's objectives while still complying with IRS rules.
