10 Types of Employer-Sponsored Retirement Plans

Employer-Sponsored Retirement plans are a great incentive to add to your company due to their low cost and numerous benefits. When it comes to choosing an employer-sponsored retirement plan it is important to consider your business type, size, as well as your current economic sector. In this blog, we will discuss the different types of employer-sponsored retirement plans.

401(k)

401(k) plans, also known as defined contribution plans, are the most common of employer-sponsored retirement plans. 401(k) plans are offered to all sizes of companies and primarily for-profit business entities. Typically, employees who enroll in 401(k) programs choose the investments they wish to participate in and upon retirement will have full control of their money. Companies often offer matching with this type of plan; however, the employee is primarily responsible for funding their retirement account. The employee's contributions are deducted from their payroll on either a pre-tax basis or an after-tax (ROTH) basis. With a 401(k) the annual contribution limit is capped at $19,500 for 2021 with a catch-up contribution limit of $6,500 for those 50 and older.


403(b)

A 403(b) is an employer-sponsored retirement plan used by non-profit companies, schools, some government organizations, and religious groups. Similar to a 401(k), the plan is funded by employees, and contributions are deducted from their payroll on either a pre-tax or an after-tax basis. Since this plan is specifically for non-profits, employer matching contributions are made less often to plan participants. The contribution limits for individuals are the same as those in 401(k) plans stated above.


Profit Sharing Plan

A Profit-Sharing plan, also known as a defined contribution plan, is an Employer Sponsored plan that only provides for a contribution to be made to the plan by the Employer (Plan Sponsor). The design of the plan determines who is covered by the plan and who shares in the contributions made by the employer. The contributions are flexible and can be decided upon each year by the Plan Sponsor and can range from 0% to 25% of eligible payroll with the IRS limits applied. Employees are typically not allowed to make any contributions to this type of retirement plan.


Money Purchase Pension Plan

A Money Purchase Pension plan, also known as a defined contribution plan, is an Employer Sponsored plan that only provides for a contribution to be made to the plan by the Employer (Plan Sponsor). The design of the plan determines who is covered by the plan and who shares in the contributions made by the employer. The contributions are stated within the plan document and the Employer is required to make the stated contribution each year to all eligible participants. Employees are typically not allowed to make any contributions to this type of retirement plan.


Defined Benefit Pension Plans

Once the most popular type of retirement plan, defined pension plans are often referred to as traditional retirement plans. Today, this type of employer-sponsored retirement plan is not as common, but it does still exist. The design of the plan defines what benefit the participant will be entitled to once they reach the stated retirement age of the plan. Based on their wages and years of service with the Employer they will receive a “defined benefit” from the plan that they can either take as a lump sum payment or they can take as a monthly benefit over their lifetime. When it comes to deciding the level of funding, benefits, and investments, the employer is the sole decision-maker.



Cash Balance Plans

Cash Balance Plans, a type of defined benefit plan, are used more frequently and are typically combined with a 401(k) plan to maximize the tax advantages for smaller businesses with large profits or with business owners who started saving for retirement at an advanced age in their careers. Like the defined benefit plan above, the design of the plan defines what benefit the participant will be entitled to once they reach the stated retirement age of the plan. Based on their wages and years of service with the Employer they will receive a “defined benefit” from the plan that they can either take as a lump sum payment or they can take as a monthly benefit over their lifetime. When it comes to deciding the level of funding, benefits, and investments, the employer is the sole decision-maker.

SIMPLE IRA

Another employer-sponsored option is the SIMPLE IRA Plan. SIMPLE is an acronym for Savings Incentive Match Plan. The SIMPLE IRA plan can only be offered by employers with less than 100 employees. Similar to other plans, employees can elect to make a payroll deduction on a pre-tax or after-tax basis that is required to be matched by the employer. The typical required match is dollar for dollar on the first 3% of deferrals that the employee makes. As of 2021, the maximum employee contribution to a SIMPLE IRA is $13,500. Employees who are eligible to contribute to multiple plans are limited to $19,500 which is an individual taxpayer’s limit annually.

SEP Plans

Commonly referred to as SEP-IRA plans, SEP is a Simplified Employee Pension plan aimed at self-employed, single-owner businesses or very small businesses, but any size employer can sponsor a SEP plan. This type of plan only allows the employer to make contributions on behalf of eligible employees. The IRS has specified guidelines as to what employees must be covered by a SEP. The contributions are flexible and can be decided upon each year by the Plan Sponsor and can range from 0% to 25% of eligible payroll with the IRS limits applied. The employee has the full entitlement to the account, however, there are IRS guidelines as to when they can withdraw the funds. While the funds are in the SEP the Employer controls where they are invested.


457(b)

457(b) retirement plans are typically used by not-for-profit and governmental entities to offer additional benefits to their key employees. A 457(b) has the same contribution limit of $19,500 for 2021. However, what is unique about 457(b) plans is that if the employer offers both a 457 and 403(b) or 401(k), the employee can contribute to both. By contributing to both, the employee doubles the limit and could contribute up to $39,000. The contributions made into the account will not be taxed until the money is withdrawn at retirement.

ESOP

The final employer-sponsored retirement plan is the ESOP/Employee Stock Ownership Plan. As the name suggests, an ESOP is a retirement plan that allows the employer to contribute and invest the funds in the company's stock for the employee's benefit. Employees then share in the benefits if owning company stock.

When it comes to choosing an employer-sponsored retirement plan, the choice is yours. As long as you're preparing for the future by saving for retirement, you are in good shape. If you have questions about employer-sponsored retirement plans, contact us today!

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