Kicker: Retirement Plans
? Defined benefit pension plan–A qualified retirement plan in which the benefit is defined as a specific dollar amount or a percentage of the employee’s income before retirement. The plan almost always specifies a reduced benefit for early retirement, death or disability.
? Defined contribution plan–A qualified retirement plan, such as the 401(k), that defines plan contributions. The employer’s annual contribution, up to a maximum set by law, is determined by a formula.
? The profit-sharing plan–A discretionary defined contribution plan in which an employer shares company profits with employees by making contributions to a profit-sharing retirement plan.
? The money purchase plan–An employer-sponsored defined contribution retirement plan in which each participant’s benefit is determined by the amount the money in the account can purchase at retirement.
? The employee stock ownership plan–A profit-sharing-like plan in which the ESOP owns shares of the sponsoring corporation. The vehicle is commonly used for both retirement and succession planning.
? SIMPLE IRA–A nonqualified, employer-sponsored individual retirement account that is funded through payroll deductions. Employers can make tax-deductible contributions by matching contributions or by making non-elective contributions.
? SEP IRA–An IRA or individual retirement annuity to which the employer contributes but which the employee owns and controls. The plan is less complicated than a money purchase or profit-sharing plan and allows greater contributions than those for deductible IRAs.
? Solo and safe harbor 401(k) plans with profit-sharing features–Defined contribution plans that are designed for, respectively, sole proprietors/self-employed professionals and small firms with multiple employees. The plans permit the purchase of life insurance and borrowing against account balances.
? 412(i) plan–A defined benefit pension plan, the funding requirements of which are exempt from the complex rules applicable to other defined benefit plans. The plan permits very large tax-deductible contributions and is funded using both annuities and life insurance.