Defined benefit, defined contribution, non-qualified deferred compensation: Which type of plan is right for your business? If you’re a business owner, chances are you will want to provide a retirement plan for yourself and your employees. With all of the
Defined benefit, defined contribution, non-qualified deferred compensation: Which type of plan is right for your business?
If you’re a business owner, chances are you will want to provide a retirement plan for yourself and your employees. With all of the responsibilities of running a small business, retirement planning may take a back seat to the day-to-day operation.
Several options are available to small business owners who want to start a company retirement program. Each has advantages and disadvantages.
Selecting the plan best suited for your business takes time. Things to consider include funding costs, tax consequences, administrative requirements and, of course, the needs of your company and employees.
A qualified or tax-qualified plan is one in which contributions are tax-deductible and there is no tax on income earned by the plan’s assets until the employee begins receiving payments.
A qualified plan can be a defined benefit or a defined contribution plan.
A defined benefit plan is one in which the amount the participant will receive upon retirement in set or defined by a formula. The formula usually is derived from the retiree’s length of service and average pay over the last several years of employment.
One form of a defined benefit plan is the traditional company pension that pays retirees a guaranteed sum for life. Defined benefit plans can be expensive and administratively complex.
A defined contribution plan is more common. The amount of the employer-employee contribution is set or defined at a particular level; for example, using a percentage of compensation. Provided the employer selects investment options under the plan that meets its prudence requirement, it bears no responsibility for the performance of the investment options of the plan.
Defined contribution plans include profit-sharing, 401k plans, owners 401k, SEP-IRA and others. Generally, qualified retirement plans must be available to all full-time and certain part-time employees. The amount of annual contributions are limited by law.
Non-qualified deferred compensation plans are those that a business offers to only certain employees, usually the owners and other highly-compensated employees. The contributions to such plans are not tax deductible in the year they are made.
As with other important financial decisions, selecting a suitable retirement program for your business requires careful examination of all options. This article is intended only to touch briefly on some of the options available to small business owners and those who are self-employed.
You should consult appropriate professionals, including tax advisors or other financial and legal advisors, before deciding what’s best for you and your business.
A little planning today can make a world of difference tomorrow.
• Troy Wada may be reached at 241-7701 or at troy.wada@axa-advisors.com.
