Here we will show the most common plan types and briefly explain the differences. If you are looking for a more in depth article you may be interested in Choosing the Right Plan For Your Business. That article goes more into the pros and cons, who the plan is ideal for, limitations etc. Please also see the Overview of Plan Types (Other).
401(k) Plan
A type of qualified Defined Contribution Plan that permits Employees to elect to defer Compensation into the plan on a pre-tax, or in the case of Roth Contributions, post-tax basis. An account is maintained for each Participant, and the retirement benefit is based on the account value at retirement. The retirement benefit is not guaranteed, as contributions will vary and fluctuations in the market will cause the account value to change.
Advantages:
- Allows employees to elect to contribute to their retirement via payroll deductions
- Employer Contributions are tax deductible up to 25% of eligible participants compensation
- Employee Contributions are tax deferred until distributed at retirement (except in the case of Roth contributions)
- Allows flexibility with employer contributions, employers may elect to have a discretionary contribution or a fixed Match Contributions
For information on 401(k) rules, click the link.
401(k) Safe Harbor Plan
A type of qualified Defined Contribution Plan that permits Employees to elect to defer Compensation into the plan on a pre-tax, or in the case of Roth Contributions, post-tax basis. In addition, the Employer contributes a ‘Safe Harbor’ contribution. Safe Harbor Employer Contributions must be 100% Vested at all times.
Advantages:
- Allows employees to make contributions to the plan via payroll deduction
- Employer contributions are tax deductible up to 25% of eligible employee compensation
- Employee Contributions are tax deferred until distributed at retirement (except in the case of Roth contributions)
- Because the Employer is required to make a Safe Harbor Contribution, the plan is deemed to pass certain non Discrimination testing
Click to learn about the Top Heavy Plan Questions for Safe Harbor Plans.
403(b) Plan
A type of plan similar to a 401(k) plan, this plan type is only available to certain entities, including non-profit organizations under IRC 501(c)(3), and public Educational and Church organizations. The plan permits Employees to defer Compensation into the plan on a pre-tax, or in the case of Roth Contributions, post-tax basis.
Advantages:
- Allows employees to elect to defer contributions
- Employer Contributions are tax deductible up to 25% of eligible Participants compensation
- Employee Contributions are tax deferred until taken out at retirement (except in the case of Roth contributions)
- Salary Deferrals are not subject to compliance (ADP) testing
- Certain plans may not be subject to ERISA
Profit Sharing Plan
A Defined Contribution Plan under which the employer may determine, annually, how much will be contributed to the plan. The plan details a formula for allocating to each Participant a portion of each annual contribution. A profit sharing plan may include a 401(k) feature.
Advantages:
- Gives employers flexibility in plan design
- Provides benefits to a mix of rank-and-file Employees and Owner/managers
- Contributions and earnings generally are not taxed until they are distributed
- The employer can choose when and how much to contribute
- Allows participants to take their benefits with them when they leave the company, easing administrative responsibilities