Retirement Plans - Contact us for over 30 years of experience in providing independent, comprehensive services in the design, implementation, communication, and administration of retirement plans. FBA currently ranks as one of the largest independent Third Party Administration (TPA) firms in the nation.


There is no better way for a company to accumulate a substantial nest egg for its loyal employees --and the working owner --than to establish a tax-favored retirement plan.

What are the basic tax advantages of a qualified retirement plan?

A qualified plan must meet a certain set of requirements in the Internal Revenue Code such as minimum participation, vesting and funding requirements. In return, the IRS provides significant tax advantages to encourage businesses to establish retirement plans including:

  • Employer contributions to the plan are tax deductible. (IRC 404)
  • Earnings on investments accumulate tax-deferred which allows contributions and earnings to compound at a faster rate. (IRC 401, 501)
  • Employees are not taxed on the contributions and earnings until they receive the funds. (IRC 402, 403)
  • Employees may make pretax contributions to certain types of plans.
  • Income taxes on certain types of distributions may be deferred by rolling over the distribution to an IRA or to another retirement plan. (IRC 401(a)(31), 403(a)(4)&(5); 402(c)(9)
  • Ongoing plan expenses are tax deductible.

In addition, sponsoring a qualified retirement plan has the following advantages:

  • Attract experienced employees in a very competitive job market--retirement plans are fast becoming a key part of the total compensation package.
  • Retain and motivate good employees--you don't want to lose them to your competitors because of the qualified plans they are offering.
  • Help employees save for their future since Social Security retirement benefits alone will be inadequate to support a reasonable lifestyle for most retirees.
  • Plan assets are protected from creditors.

Types and Choices of Plans

The range of retirement plan alternatives is extensive; our consultants can help you choose the right plan for your company.

Qualified retirement plans generally fit into one of two broad categories: Defined Contribution plans and Defined Benefit plans.

What is a Defined Contribution plan?

A defined contribution plan defines the contribution the company will make to the plan and how the contribution will be allocated among the eligible employees. A defined contribution plan provides for an individual account for each participant and for benefits based solely upon the amount contributed to the participant's account, and any income, expenses, gains and losses, and any forfeitures of accounts of other participants which may be allocated to such participant's account. Some plans may also permit employees to make contributions on a before-and/or after-tax basis.

Since the contributions, investment results and forfeiture allocations vary year by year, the ultimate retirement benefit cannot be predicted. The employee's retirement, death or disability benefit is based upon the amount in his account at the time the distribution is payable.

Employer account balances may be subject to a vesting schedule. Non-vested account balances forfeited by terminating employees can be used to reduce employer contributions, plan expenses, or be reallocated to active participants.

Defined contribution plans include the following:

  • Money Purchase Pension plans
  • 401(k) plans
  • Target Benefit plans
  • Profit Sharing plans
  • Age Based Profit Sharing plans
  • Comparability Plans
  • Thrift or Savings plans
  • 403(b) plans
  • Stock bonus plans
  • Employee Stock Ownership Plans (ESOPs)
  • Simplified Employee Pensions (SEPs)
  • Savings Incentive Match Plans for Employees (SIMPLE plans)

Three major characteristics of a retirement plan being classified as a defined contribution plan:

  1. plan contributions are determined by formula and not by actuarial requirements (except for target benefit plans);
  2. plan earnings and losses are allocated to each participant's account and do not affect the company's retirement plan costs; and
  3. plan benefits are not insured by the Pension Benefit Guaranty Corporation (PBGC).

What is a Money Purchase Pension plan?

A money purchase pension plan operates like a profit sharing plan. The major difference is that, unlike profit sharing plans where employers are permitted to make discretionary contributions each year, the employer has a set contribution rate which is stated in the plan document. Contributions are generally based on a fixed percentage of each employee's compensation. For tax deduction purposes, the company contribution cannot exceed 25% of total compensation to a maximum of $49,000 per employee in 2010. The contribution may be integrated with Social Security which results in larger contributions for higher paid employees.

Forfeitures that occur because of employee turnover may reduce future contributions of the company or may be used to increase the benefits of remaining participants. Retirement benefits are based on the amount in the participant's account at the time of retirement.

The obligation to fund the plan makes a money purchase pension plan different. In most profit sharing plans, there are generally no unfavorable consequences for the company if it fails to make a contribution. However, if the company maintains a money purchase pension plan, its failure to make a contribution can result in the imposition of a penalty tax.  Contributions must be made to a money purchase pension plan even if the company has no profits. With the increase in the primary limitation on tax-deductible contributions to a profit sharing plan to 25 % of total compensation, there is little reason for an employer to adopt or continue to maintain a money purchase pension plan.

What is a Target Benefit plan?

A target benefit plan is a hybrid or cross between a defined benefit plan and a money purchase pension plan. It is like a defined benefit plan in that the annual contribution is determined by the amount needed each year to accumulate (at an assumed rate of interest) a fund sufficient to pay a projected retirement benefit (the target benefit) to each participant on reaching retirement age. Thus, if a target benefit plan contains a target formula, such as 40 percent of compensation, that is identical to the benefit formula in a defined benefit plan and is based on identical actuarial assumptions (e.g., interest rates, mortality, employee turnover), the employer's initial contribution for the same group of employees will be the same.

However, this is where the similarity ends. In a defined benefit plan, if the actual experience of the plan differs from the actuarial assumptions used (for example, if the interest earned is higher or lower than the assumptions), then the employer either increases or decreases its future contributions to the extent necessary to provide the promised benefits. In a target benefit plan, however, the contribution, once made, is allocated to separate accounts maintained for each participant. Thus, if the earnings of the fund differ from those assumed, this does not result in any increase or decrease in employer contributions; instead, it increases or decreases the benefits payable to the participant.

In this regard, the target benefit plan operates like a money purchase pension plan. In fact, the only difference between a money purchase pension plan and a target benefit plan is that in a money purchase pension plan contributions are generally determined and allocated as a percentage of current compensation; in a target benefit plan, contributions are determined as if the plan were to provide a fixed benefit. In a money purchase pension plan, contributions for identically compensated employees are the same even though their ages differ; in a target benefit plan, age is one of the factors that determine the size of the contributions. Because older employees have less time in which to have their benefits funded, employer contributions on their behalf are greater, as a percentage of compensation, than for younger employees. Consequently, target benefit plans appeal to employers that desire to benefit older employees.

What is a Profit Sharing plan?

A profit sharing plan is a defined contribution plan to which the company agrees to make "substantial and recurring," although generally discretionary, contributions. Amounts contributed to the plan are invested and accumulate (tax-free) for eventual distribution to participants or their beneficiaries either at retirement, after a fixed number of years, or upon the occurrence of some specified event (e.g., disability, death, or termination of employment). The profit sharing plan is one of the most flexible qualified plans available.

Unlike contributions to a pension plan, contributions to a profit sharing plan are usually keyed to the existence of profits. However, neither current nor accumulated profits are required for a company to contribute to a profit sharing plan. Even if the company has profits, it can generally forgo or limit its contribution for a particular year if the plan contains a discretionary formula. Although most profit sharing plans adopt a discretionary contribution formula, others adopt a fixed contribution formula.
A profit sharing plan must provide a definite predetermined formula for allocating the contributions made to the plan among the participants. A formula for allocating the contributions among the participants is definite if, for example, it provides for an allocation in proportion to the compensation of each participant.  

The maximum annual amount that may be credited to an employee's profit sharing account is limited to the lesser of 100% of compensation or $49,000 for 2010 Although the percentage limit has substantially increased from 25% to 100%, there are still tax deduction limits that must be taken into consideration. For example, the maximum company profit sharing deduction is limited to 25% of total compensation.
As with other defined contribution plans, retirement benefits in profit sharing plans are based on the amount in the participant's account at retirement. Unlike defined benefit plans, forfeitures in profit sharing plans arising from employee turnover may be reallocated among the remaining participants.

What is an Age-based Profit Sharing plan?

An age-based profit sharing plan is a profit sharing plan that uses both age and compensation as a basis for allocating employer contributions among plan participants. This concept is similar to a target benefit plan, where age and compensation are factors used to determine the amount of the employer contribution.

All of the basic requirements that apply to regular profit sharing plans also apply to an age-based profit sharing plan. An age-based profit sharing plan can have a discretionary contribution formula and provide the employer with flexibility over the amount of the contribution to be made each year.

Because age is a factor, this type of plan favors older employees who have fewer years than younger employees to accumulate sufficient funds for retirement. For purposes of satisfying the nondiscrimination requirements, an age-based profit sharing plan is tested under the cross-testing rules.

What is a Comparability plan?

These plans, sometimes referred to as "cross-tested plans," are profit sharing or money purchase pension plans (defined contribution plans) that are tested for nondiscrimination as though they were defined benefit plans. By doing so certain employees may receive much higher allocations than would be permitted by defined contribution nondiscrimination testing. New comparability plans are generally utilized by small businesses who want to maximize contributions to owners and higher paid employees while minimizing those for all other employees.

Employees are separated into two or more identifiable groups such as owners and non-owners. Each group may receive a different contribution percentage. For example, a higher contribution may be given to the owner group than the non-owner group, as long as the plan satisfies the nondiscrimination requirements.

As with an age-based profit sharing plan, to satisfy the nondiscrimination requirements, a comparability plan is tested under the cross-testing rules.  A comparability plan must contain a definite predetermined formula for allocating contributions made to the plan among the participants.

What is a Thrift or Savings plan?

A thrift or savings plan is a defined contribution plan in which employees are directly involved in contributing toward the ultimate benefits that will be provided. The plan can be in the form of a money purchase pension plan or a profit sharing plan.
These plans are contributory in the sense that employer contributions on behalf of a particular employee are geared to mandatory contributions by the employee. Employees can participate in the plan only if they contribute a part of their compensation to the plan.

Employer contributions are made on a matching basis --for example, 50 percent of the contribution made by the employee. The plan may permit the employer, at its discretion, to make additional contributions and may also permit employees to make voluntary contributions. A contributory plan must satisfy a nondiscrimination test that compares the relative contribution percentages of HCEs with those of NHCEs.  401(K) Plans have for the most part replaced these types of plans.

What is a 401(k) plan?

A 401(k) plan is a qualified profit sharing or stock bonus plan that offers participants an election to receive company contributions in cash or to have these amounts contributed to the plan.  An eligible employee may make a cash-or-deferred election (CODA) to have the employer make a contribution to the plan on the employee's behalf or pay an equivalent amount to the employee in cash. The amount contributed to the plan under the CODA on behalf of the employee is called an elective contribution. Subject to certain limitations, elective contributions are excluded from the employee's gross income for the year in which they are made and are not subject to taxation until distributed.

More and more employees perceive 401(k) plans as a valuable benefit, which has made them the most popular retirement plans today. Employees can benefit from a 401(k) plan even if the employer makes no contribution. Employees voluntarily elect to make pre-tax contributions through payroll deductions up to an annual maximum limit of $16,500 in 2010.

Beginning in 2002, employees age 50 and older were able to defer an additional amount (referred to as "catch-up contributions"). The catch-up contribution amounts increase after 2002 by $1,000 each year until reaching $5,500 in 2010.

Often the employer will match some portion of the amount deferred by the employee to encourage greater employee participation, i.e., 25% match on the first 4% deferred by the employee. Since a 401(k) plan is a type of profit sharing plan, profit sharing contributions may be made in addition to or instead of matching contributions. Many employers offer employees the opportunity to take hardship withdrawals or borrow from the plan.

Employee and employer matching contributions are subject to a special nondiscrimination test which limits how much the group of employees referred to as a "Highly Compensated Employees" can defer based on the amount deferred by the "Non-Highly Compensated Employees." The plan may be designed to satisfy "401(k) Safe Harbor" requirements (certain minimum employer contributions and 100% vesting of employer contributions) which can eliminate this nondiscrimination test.
Benefits attributable to employer contributions to a 401(k) plan generally may not be distributed without penalty until the employee retires, becomes disabled, dies, or reaches age 59 1/2. Contributions made by the employer to the plan at the employee's election are non-forfeitable (i.e., 100 percent vesting is required at all times).

For years beginning before 1997, state and local governments and tax-exempt organizations were prohibited from maintaining 401(k) plans, unless the plan was established prior to May 6, 1986, in the case of a plan sponsored by a state or local government, or prior to July 2, 1986, in the case of a plan sponsored by a tax-exempt organization. This prohibition did not apply to a rural cooperative plan. For years beginning after 1996, 401(k) plans are available to tax-exempt organizations, but remain unavailable to state and local governments other than a rural cooperative plan.

Employees who participate in 401(k) plans assume responsibility for their retirement income by contributing part of their salary and, in many instances, by directing their own investments. Each 401(k) plan participant will need to consider the investment objectives, the risk and return characteristics, and the performance over time of each investment option offered by the plan in order to make sound investment decisions. Fees and expenses are one of the factors that will affect the investment returns and will impact the participant's retirement income.

What is a Stock Bonus plan?

A stock bonus plan is similar to a profit sharing plan, except that benefit payments must be made in shares of stock of the company. However, a stock bonus plan may distribute cash to a participant, subject to the participant's right to demand a distribution of employer securities. Further, if the plan permits cash distributions and the employer securities are not readily tradable on an established market, participants must be given the right to require the company to repurchase the shares of stock it distributes to them under a fair valuation formula.

What is an Employee Stock Ownership Plan (ESOP)?

An ESOP is a type of profit sharing plan that is required to invest primarily in the employer's stock. Although the rules surrounding an ESOP are somewhat unique and differ from those which apply to a regular profit sharing plan, the general principals are the same.

As the name implies, employees have some ownership in the employer. As owners, employees may be more motivated to improve corporate performance because they can benefit directly from company profitability.

What is a Simplified Employee Pension (SEP)?

A SEP is a defined contribution plan that takes the form of an individual retirement account (IRA) but is subject to special rules. A SEP may be adopted by both incorporated and unincorporated businesses.

What is a Savings Incentive Match Plan for Employees (SIMPLE)?

A SIMPLE plan may be adopted by small employers who do not maintain another employer-sponsored retirement plan covering the same employees. A SIMPLE plan may be either in the form of an IRA for each employee (in this case, the employer cannot maintain any other qualified retirement plan whether or not covering the same employees) or part of a 401(k) plan.

If established in an IRA form, a SIMPLE plan will not be subject to the nondiscrimination rules generally applicable to qualified retirement plans (including top-heavy rules), and simplified reporting requirements will apply. A SIMPLE plan may be adopted by both incorporated and unincorporated businesses.

What is a Defined Benefit plan?

A defined benefit plan is a retirement plan "other than an individual account plan." In other words, a plan that is not a defined contribution plan is classified as a defined benefit plan. Under a defined benefit plan, retirement benefits must be definitely determinable. For example, a plan that entitles a participant to a monthly pension for life equal to 30 percent of monthly compensation is a defined benefit plan. The most common types of defined benefit plans are flat benefit plans and unit benefit plans.

If a plan is categorized as a defined benefit plan: (1) plan formulas are geared to retirement benefits and not to contributions (except for cash balance plans); (2) the annual contribution is usually actuarially determined; (3) certain benefits may be insured by PBGC; (4) early termination of the plan is subject to special rules; and (5) forfeitures reduce the company's cost of providing retirement benefits.

Participants begin to earn (accrue) retirement benefits as soon as they become a participant in a defined benefit plan. However, they do not obtain a permanent right to the benefits (become vested) until they have worked a minimum period of time, as specified in the plan. The participants will then have a legal right to receive a portion, or all, of the benefits at retirement age, even if they change jobs and go to work for another employer before reaching retirement age. Participants may lose their accrued benefits if they leave employment before becoming vested, even if they return to the same employer in later years. For example, a worker who leaves a company after four years of service and returns after a five-year break can lose credit for the first four years. Being vested means that a participant covered by a defined benefit plan has completed sufficient years of service and is entitled to receive benefits accrued under the plan, whether or not the participant continues with the company until retirement.

The benefit amount earned in a defined benefit plan is determined by a formula that is spelled out in the plan. Usually, it involves compensation and years of service. The longer someone works under the same defined benefit plan, the larger the retirement benefit. Some plans are integrated with Social Security benefits. This means that, in these plans, retirement benefits can be reduced because of Social Security coverage.

Defined benefit plans usually are funded entirely by the employer. Employers generally contribute enough annually to cover the normal cost of the plan --an amount that is at least the value of the benefits that participants in the plan have earned that year. In addition, employers may have to make additional contributions for various reasons, such as to make up for any investment losses by the plan. If an employer fails to make the legally required contributions, the employer can be assessed taxes for each year the deficiency exists. The IRS may permit the employer to pay the contribution in future years under a funding waiver arrangement.

Who To Call

To learn more about the services FBA has to offer or to obtain a customized proposal request form, please call, fax or E-mail:

Richard (Dick) Watson
Direct Line:  (504) 849-1030
Fax:  (504) 835-9296

He will be happy to assist you or schedule an appointment to discuss how FBA can be your Retirement Plan Resource. 


Copyright © 2006, Fringe Benefits Administrators, LTD. All Rights Reserved.
Website design by Website Pros