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Defined-Contribution Plans are plans where the employee chooses when and how much of their earnings they want to contribute to their own retirement account.  A 401k plan is an example of a Defined-Contribution plan.

Simple Plans

There are several types of defined-contribution plans and these vary in complexity and cost.  A “SIMPLE” plan will require the employer to make a mandatory contribution to the employee accounts.  But there are no discrimination tests, very little reporting requirements, and no administrator is required. 

SEP Plans

SEP is an acronym for Simplified Employee Pension plan.  These are also easy to set up, maintain, and have low associated costs.  But the employer is required to contribute a level percentage contribution to all employees.  This means if the owner wants to contributed 10% of his/her earnings to the account, 10% of all eligible employee earnings must be contributed at the same time. 

401k Plans

These plans are the most common in today’s workplace.  There is a lot of variability from one plan to the next.  We recommend you find an experienced broker to set up your plan.  The flexibility includes having a plan where only employee deferrals are required (employee election to defer a specific amount of money into his/her account).  Although seemingly easy, the plan is subject to discrimination testing where failure may require additional employer contributions to pass the tests.  Many companies set up a “Safe Harbor” plan.  These plans avoid some of the testing, but require a mandatory match or profit sharing and an immediate vesting of employer contributions. 

The discussion with a new group should start out by uncovering what the objective of the plan is.  Is it to maximize the owner’s contribution?  Is it to maximize the retention of employees?  Is the company in growth mode and trying to attract prospective employees with their benefits package?    

Although Qualified Plans are designed to not discriminate among employees, there is a profit sharing arrangement that is allowed to discriminate in favor of certain employees.  A New Comparability Profit Sharing design allows discrimination based on class and age.  Depending on the demographics, this approach may be very favorable for owners and management. 

For more information, please contact Bridgeport Benefit Advisors.

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The material on this page is intended as general descriptions of the concepts presented.  It is for educational purposes only and it not intended to provide specific financial or tax advice.  These descriptions cannot take into account your specific conditions and situation including the data required for underwriting purposes, financial circumstances, risk tolerance, and other factors.