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A defined benefit plan provides a defined benefit at retirement. The benefit may be expressed as an exact dollar amount, such as $1000 per month, or may be based on a formula that takes such factors as salary and service into consideration. A defined benefit plan is funded by employer contributions, which are actuarially determined. A traditional defined benefit plan offers the widest range of investment options, but the employer bears the risk of market loss.

Unlike a defined benefit plan, a defined contribution plan does not guarantee a set benefit at retirement. Instead, employer and employee contributions are allocated to an employee’s separate account, and the ultimate retirement benefit depends upon investment performance. There are annual limits for both employer and employee contribution amounts, which vary from year to year.

A profit-sharing plan is a type of defined contribution plan funded by discretionary employer contributions. The amount of an employer’s contributions is generally expressed as a percentage of an employee’s salary. However, the employer is not required to make a contribution in any given year. This makes a profit-sharing plan the most flexible qualified retirement plan. Each year the employer decides how much, if any, to contribute to the plan. While the employer’s contribution is subject to maximum limits, there is no minimum required contribution.

A 401(k) plan is a type of defined contribution plan that relies primarily on employee contributions. It is the most popular type of retirement plan because it is the easiest to administer and does not require employer contributions. Employees can elect to make pre-tax contributions through payroll deductions to a 401(k) plan up to an annual maximum which is adjusted on an annual basis. Employers will often match a portion of their employees’ contributions to encourage greater Participation.

A money purchase pension plan is similar to a profit-sharing plan. However, there is one major difference between a money purchase pension plan and a profit-sharing plan. Employers are required to make annual contributions to a money purchase pension plan. Contributions are not discretionary like in a profit-sharing plan. The amount of the employer’s required annual contribution to a money purchase pension plan is set forth in the plan document, and the employer is required to make the annual contribution whether the employer had a good year or a bad year. Failure to make required contributions can result in the imposition of penalties. For this reason, a money purchase pension plan is the least flexible of defined contributions plans.

New comparability plans are sometimes referred to as “cross-tested plans”. They are profit-sharing plans that allow an employer to maximize contributions for highly compensated or key employees who tend to be older. An employer can separate its employees into different groups and provide a different contribution percentage for each group. 

These non-discrimination tests are complicated, and not every third-party administrator can perform them. However, FAC has the experience and technology necessary to administer new comparability plans.