Plan Design Options
Various plan design options exist; Nova can help you choose the plan best suited to you, as well as provide you with the relevant design services for your plan. Please see the table below for a comparison of various Plan Types, and click on a plan for more details.
Defined Benefit vs. Defined Contribution Plans
| Defined Benefit Plans | Defined Contribution Plans | ||||||
| Traditional 401(k) | Safe Harbor 401(k) | Profit Sharing | Cross-tested | Money Purchase | |||
| Key Advantage | Provides a fixed, pre-established benefit for employees. | Permits higher level of salary deferrals by employee than other retirement vehicles. | No nondiscrimination testing required. | Permits employer to make large contributions for employees. | Can target specific group of participants for greater employer contributions | Permits employer to make large contributions for employees. | |
| Employers Who Can Provide This Option | Any employer with one or more employees. | ||||||
| Employer's Responsibilities | There is no model form to establish a plan. Advice from a financial institution or employee benefit advisor would be necessary. Annual filing of Form 5500 is required. An actuary must determine annual contributions. | There is no model form to establish a plan. Advice from a financial institution or employee benefit advisor would be necessary. Annual filing of Form 5500 is required. Also requires annual non-discrimination testing to ensure plan does not discriminate. | There is no model form to establish a plan. Advice from a financial institution or employee benefit advisor would be necessary. Annual filing of Form 5500 is required. | There is no model form to establish a plan. Advice from a financial institution or employee benefit advisor would be necessary.This is a complex design, and therefore requires a greater level of expertise. Annual filing of Form 5500 is required. | There is no model form to establish a plan. Advice from a financial institution or employee benefit advisor would be necessary. Annual filing of Form 5500 is required. | ||
| Funding Responsibility | Primarily funded by employer. | Either employee salary reduction contributions, employer contributions, or both. | Employee salary reduction contributions and employer contributions. | Annual employer contribution is discretionary. | Employer contributions are fixed. | ||
| Maximum Annual Contribution (Per participant) | Actuarially determined contribution. | Employee: $16,500 in 2009. Additional contributions can be made by participants age 50 or over. Employer/Employee Combined: Contributions per participant up to the lesser of 100% of compensation or $49,000.1 Employer can deduct amounts that do not exceed 25% of aggregate compensation for all participants. |
Contributions per participant up to the lesser of 100% of compensation or $49,000.1 Employer can deduct amounts that do not exceed 25% of aggregate compensation for all participants. | ||||
| Defined Benefit Plans | Defined Contribution Plans | ||||||
| Traditional 401(k) | Safe Harbor 401(k) | Profit Sharing | Cross-tested | Money Purchase | |||
| Minimum Employee Coverage Requirements | Generally, must be offered to all employees at least age 21 years of age who worked at least 1,000 hours in a previous year. | ||||||
| Withdrawals & Payments | Payment of benefits only upon reaching normal retirement age, termination of employment, plan termination, disability, or death. | Salary deferrals cannot be withdrawn until a specified event, such as reaching age 59 ½, death, severance from employment, or in other limited circumstances. May permit hardship withdrawals. Withdrawals may be subject to a possible 10% early withdrawal penalty. | Withdrawals can be made after contributions have remained in the plan for at least two years, the participant has attained a certain age, or other specified occurrence as set forth in the plan. Withdrawals may be subject to a possible 10% early withdrawal penalty. | Payment of benefits only upon reaching normal retirement age, termination of employment, plan termination, disability, or death. | |||
| Loans permitted | Yes, with restrictions | ||||||
| Vesting | May vest over time according to plan terms. | Employee salary deferrals are immediately 100% vested. Employer contributions may vest over time according to plan terms. | Employee salary deferrals and required employer contributions are immediately 100% vested. Addional employer contributions may vest over time according to plan provisions. | May vest over time according to plan provisions. | |||
| Contribution Options | Employer makes contribution as required by plan terms, and calculated by an enrolled actuary. | Employee can elect how much to contribute pursuant to a salary reduction agreement. Additionally, the employer can make additional contributions, including possible matching contributions. | Employee can elect how much to contribute pursuant to a salary reduction agreement. Additionally, the employer must either make specified matching contributions or a 3% contribution to all participants.3 | The amount of the contribution is discretionary on the part of the employer. The allocation of the contribution is set by plan terms. | Employer makes contribution as required by plan terms. | ||
| Notes | 1Maximum compensation on which contributions can be based is $245,000. | 1Maximum compensation on which contributions can be based is $245,000. 2 Maximum compensation on which employer 2% non-elective contributions can be based is $245,000. 3 Match must be 100% of deferral up to 3% of compensation, plus 50% of deferral from 3% to 5% of compensation. |
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IRA Plans
| IRA Plans | |||
| SEP-IRA | SIMPLE-IRA | Payroll Deduction IRA | |
| Key Advantage | - | Salary reduction plan with little administrative paperwork. | Easy to set up and maintain. |
| Employers Who Can Provide This Option | Any employer with one or more employees. | Any employer with 100 or fewer employees that does not currently maintain another retirement plan. | Any employer with one or more employees. |
| Employer's Responsibilities | Set up plan, for example, by completing IRS Form 5305-SEP. No annual filing requirement for employer. | Set up plan, for example, by completing IRS Form 5304-SIMPLE or IRS Form 5305-SIMPLE. No annual filing requirement for employer. Bank or financial institution does most of the paperwork. | Arrange for employees to make payroll deduction contributions. Transmit contributions for employees to IRA. No annual filing requirement for employer. |
| Funding Responsibility | Employer contributions only. | Employee salary reduction contributions and employer contributions. | Employee contributions remitted through payroll deduction. |
| Maximum Annual Contribution (Per participant) | Up to 25% of compensation or a maximum of $45,000. 1 | Employee: Up to $10,500 in 2007. Additional contributions can be made by participants age 50 or over. Employer: Either match employee contributions 100% of first 3% of compensation (can be reduced to as low as 1% in any 2 out of 5 yrs.) or contribute 2% of each eligible employee's compensation.2 |
$4,000 for 2005 - 2007;$5,000 for 2008. Additional contributions can be made by participants age 50 or over. |
| Minimum Employee Coverage Requirements | Must be offered to all employees who are at least 21 years of age, employed by the employer for 3 of the last 5 years and earned at least $450. | Must be offered to all employees who have earned at least $5,000 in any prior 2 years, and are reasonably expected to earn at least $5000 in the current year. | Must be made available to all employees. |
| IRA Plans | |||
| SEP-IRA | SIMPLE-IRA | Payroll Deduction IRA | |
| Withdrawals & Payments | Withdrawals at anytime; subject to current federal income taxes and a 10% early withdrawal penalty, unless certain exceptions apply. | Withdrawals at any time. If employee is under age 59 ½, may be subject to a 25% penalty if taken within the first 2 years of participation and a possible 10% penalty if taken afterwards. | Withdrawals at anytime; subject to current federal income taxes and a 10% penalty if the participant is under age 59 ½. |
| Loans permitted | No | ||
| Vesting | Immediate 100% | Employer and employee contributions are vested 100% immediately. | Immediate 100% |
| Contributor's Options | Employer can decide whether to make contribution year to year. | Employee can decide how much to contribute. Employer must make matching contributions or contribute 2% of each employee's salary up to the set maximum. | Employee can decide how much to contribute at any time. |
| Notes | 1Maximum compensation on which contributions can be based is $225,000. 2 Maximum compensation on which employer 2% non-elective contributions can be based is $225,000. |
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