Pension and Profit Sharing plans are an attractive employee benefit because employers who choose to provide them help participants accumulate wealth for retirement and future needs on a tax deductible basis. Small business owners find that the cost to provide these benefits is more than offset by the increased productivity from an appreciative work force as well as the enhanced attraction and retention of quality employees.
Pension & Profit Sharing Plans are popular for good reasons:
• Employer contributions to the plan are on a tax deductible basis.
• The investment return on these funds is not taxed within the fund.
• Employees do not claim income for tax purposes until distributed.
Pacific Pension & Benefit Services, Inc. offers numerous Pension and Profit Sharing plans tailored to your needs. These plans can be totally funded by employer contributions, employee contributions, or a combination. Usually there is some employer participation in the contributions to the plan, and if the employee makes contributions to the plan they must have some discretionary income.
Plan Types
There are basically four types of Defined Contribution Plans:
• Profit Sharing
• 401(k)
• Money Purchase Pension
• Employee Stock Ownership (ESOP).
If the Employer would rather provide a projected level of benefits at retirement, usually expressed as a percent of the final average compensation, then the Defined Benefit Pension type of plan is selected.
All companies have different objectives. Your PPBS consultant will assist you in determining your objectives and help you design a benefits package to meet those objectives. Issues including tax considerations, contribution flexibility, employee demographics, compensation ranges, turnover, competition, and investment philosophy are taken into consideration in designing the plan(s).
All Employers Eligible to Provide Benefits
Any business can adopt a plan: Corporations (regular or S type), Sole Proprietorships, Non-Profits or active Partnerships. The only criterion in a non-corporate situation is that income used to fund the plan must be “earned income” vs. “passive income.” It should be noted that even self-employed individuals can adopt a plan.
Two basic categories of plans exist that are used to provide for the tax deferred accumulation of wealth at retirement and will be used to provide retirement income for you and your employees:
• The Defined Contribution Plan provides a defined contribution, usually expressed as a percentage of pay, with the retirement income dependent on the contributions made coupled with the investment return on those contributions.
• The Defined Benefit Plan provides a formula specified retirement benefit with the annual contribution varying each year based on the plan’s investments, mortality and turnover experience. Frequently, in a Defined Benefit plan, the small business Owner (those with less than ten employees) will see 80% or more of the annual deposit allocated to his or her personal benefit.