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• Simplified
Employee Pension (SEP)
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Simple IRA
•
Profit Sharing
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Age-weighted/comparablility profit
sharing plans
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401(k) profit sharing
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Safe-harbor 401(k)
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Owner only/one-person 401(k)
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Defined benefit pension |
401(k) Profit Sharing Plans
A 401(k) plan is a type of profit sharing plan that includes an elective
salary deferral provision. The employer typically has the ability
to make a matching contribution that is tied to the elective salary
deferral, as well as a profit sharing contribution that is allocated
to all eligible participants. Plan participants usually have the ability
to select their own individual asset allocation from various investment
alternatives available to the plan.
Roth 401(k) Profit Sharing Plans
A Roth 401(k) plan is a new feature of a 401(k) plan that permits
participants to make after tax salary deferrals into a 401(k) plan.
If the employer elects to offer the Roth 401(k) provision, participants
will have a choice of making pre-tax or after-tax salary deferrals.
Eligibility
Employee eligibility requirements for 401(k) plans are typically one
year of service and age 21.
Contributions
The three common 401(k) contribution types are:
• Elective salary deferral –
the employee can defer up
to $15,000 for 2006. (This is an indexed
amount subject to cost of living adjustments
and may change each year.)
• Employer matching – the
employer can make a discretionary
contribution based on a percentage
of the employee’s elective salary deferrals.
• Profit sharing – can be
allocated in any method
available to regular profit sharing plans.
An employer’s maximum deduction is limited to 25% of the annual
compensation paid to eligible employees. 3In addition,
the employer must meet several non-discrimination tests, which may
further limit the amounts deferred by certain highly paid employees.
Employees age 50 and older may make a $5,000 catch-up contribution,
which does not count against their individual maximum annual additions
limit of the lesser of $44,000 or 100% of compensation.
Advantages
A 401(k) plan allows both employer and employees to contribute toward
retirement while reducing the current tax burden of both. Because
employees are actively involved as participants, 401(k) plans typically
have a high visibility level in terms of the employee’s perception
of the benefit being provided by the employer.
3Only employer matching and profit sharing contributions.
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