How They Work

Retirement Plans
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Defined Contribution Plan

In a Defined Contribution Plan, both the sponsor/employer and employee can make contributions to the plan, which offers tax incentives to both parties.  The sponsor/employer is not taxed on the amount contributed, and generally the employee does not pay taxes on the amount either, until he/she begins taking distributions. The balance on these accounts depends on the market value at any given time. 

  • 401(k) – salary deferral

  • 401(k) Safe Harbor – Click for Example

  • 403(b) – for certain not-for-profits

  • 457 – for government employees

  • Money Purchase – providing for guaranteed contributions

  • Non-qualified – for select group of management and key executives

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Defined
Benefit Plan

Unlike a Defined Contribution Plan, only the employer will contribute to a Defined Benefit Plan.  Benefits are based on the employee’s salary and years of service.  These plans, much like the Defined Contribution plans, have the same tax incentives offered to both the sponsor/employer and employee.

  • Defined Benefit (traditional) – providing guaranteed benefits for participants based on their salary and years of service

  • Cash balance – a defined benefit plan providing for guaranteed benefits that is structured to resemble a defined contribution plan
    Click for Example

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Profit
Sharing Plan

Profit Sharing Plans are Defined Contribution plans with discretionary contributions.  The plan sponsor determines the contributions, and a contribution may not be required every year.

  • Profit Sharing (traditional including integrated plans) – providing for discretionary employer contributions

  • Age-weighted