Traditional Profit Sharing Plan (Defined Contribution)

A Profit Sharing Plan is a defined contribution plan that allows eligible employees to share in profits generated by the business while enabling the employer to make annual contributions on a discretionary basis. In a traditional plan, contributions are based on the ratio of each participant’s compensation to the total eligible compensation.

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Profit Sharing Plan Integrated with Social Security (Defined Contribution)

A plan integrated with social security can provide for contributions and benefits which favor highly paid employees as long as the plan complies with rules which limit the disparity above and below a specified level and provides some minimum benefit for all employees. This type of plan relies on an Internal Revenue Code provision in which the IRS acknowledges the fact that your social security benefit decreases as your income increases.

The “integration” is the level of income you choose to determine which employees you want to receive a “larger piece of the pie”. It is one of the few qualified plan provisions that permit plans to favor highly paid employees.

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Age Weighted Plan (Defined Contribution)

The age-weighted method allocates contributions based on both the age and compensation of eligible employees. Since the participant’s age, or length of time until retirement, is factored into the allocation formula, older participants receive a larger proportionate share of the contribution. This can be advantageous in a situation where the principal employees are significantly older than the other employees. In certain situations, an age weighted plan design works extremely well, but a possible drawback could be employees with the same salaries receive a different allocation, based on age. Also, an older non-principal employee may receive a larger share than a younger principal.

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New Comparability Plan (Defined Contribution)

The comparability, or cross-tested, allocation method allows the employer to divide the participants into different classifications for purposes of allocating the contribution. If non-discrimination requirements are met, a larger share of the company’s contribution may be made on behalf of those participants to whom the employer wishes to provide a more significant benefit. The non-discrimination testing is based on projected benefits at retirement, similar to a defined benefit plan. If the aggregated age of the preferred class is higher than the other classes, the allocation of current dollars can be skewed proportionately toward the older group.

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401(k) Plan (Defined Contribution)

The 401(k) Plan allows employees to make contributions with pretax dollars. These contributions are generally made by payroll deductions. The maximum amount an employee may contribute to a 401(k) plan in 2009 is $16,500. The employer may choose to match the employee deferrals.

IRS regulations require the use of ADP and ACP nondiscrimination tests to determine the maximum contribution levels for highly compensated employees. These tests are designed to ensure that the plan benefits all employees in a nondiscriminatory manner and can make it difficult for some employers to pass the nondiscrimination tests.

A profit sharing provision (with a traditional, integrated, age-weighted or new comparability allocation) may be added to the 401(k) Plan.

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Safe Harbor 401(k) with Matching Contribution (Defined Contribution)

This plan is a 401(k) Plan in which employees can defer up to the lesser of $16,500 (for 2009) or 100% of compensation. Employer is required to make a match contribution of 100% of employee deferrals up to 3% of compensation, plus 50% of employee deferrals in excess of 3% up to 5% of compensation. All employer match contributions are immediately 100% vested. If the employer makes the required match, ADP and ACP nondiscrimination testing is not required.

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Safe Harbor 401(k) with 3% Non-Elective Contribution (Defined Contribution)

This plan is a 401(k) Plan in which employees can defer up to the lesser of $16,500 (for 2009) or 100% of compensation. The employer is required to contribute 3% of compensation on behalf of all eligible employees. The employer contribution is immediately 100% vested. If the employer makes the required 3% contribution, ADP nondiscrimination testing is not required.

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Defined Benefit Plan

A defined benefit plan is designed to provide a specific benefit amount at retirement. This is the traditional “pension” plan in which the employer bears the risk of providing the promised level of retirement benefits to participants. This plan provides a pre-defined annual retirement income for employees. Contributions are based on specific income requirements, along with actuarial variables such as years until retirement, life expectancy, and compensation.

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