Plan Types

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401(k) Salary Reduction Plan

A 401(k) Salary Reduction Plan is a qualified plan that contains a cash-or-deferred arrangement (CODA). Subject to certain limitation, elective contributions are excluded from the employee’s gross income for the year in which they are made and are not subject to taxation until distributed. A 401(k) plan may be a stand-alone plan or may permit other types of employer contributions (matching or profit sharing).

Safe Harbor 401(k)

Safe Harbor 401(k) Plans are 40l(k) plans under which an employer will no longer be required to perform nondiscrimination testing of elective contributions or matching contributions. To fall within the safe harbor, the plan must meet employer contribution requirements and must provide for 100 percent immediate vesting of these contributions.

Profit Sharing

A Profit Sharing plan is a defined contribution plan to which the company agrees to make “substantial and recurring” contributions, although generally discretionary. Amounts contributed to the plan are invested and accumulate (tax-free) for eventual distribution to participants. A profit sharing plan must provide a definite predetermined formula for the allocation of the contributions made to the plan among the participants.

Age-Weighted Profit Sharing

An Age-Weighted Profit Sharing plan is a plan that uses both age and compensation as the basis for allocating employer contributions among plan participants. Because age is a factor, this type of plan favors older employees who have fewer years than the younger employees to accumulate sufficient funds for retirement.


A SEP is an individual retirement account or individual retirement annuity (IRA) established for an employee to which the employer makes direct tax-deductible contributions.


SIMPLE plans were created by the Small Business Job Protection Act of 1996 and were allowed beginning January 1, 1997. They do not require discrimination testing and are exempt from both the top-heavy rules and Section 415 limitations. An employer that has 100 or fewer employees with at least $5,000 of compensation in the preceding calendar year is eligible to sponsor a SIMPLE plan. SIMPLE plans mandate fixed levels of employer contributions, which must be 100 percent immediately vested.

Money Purchase Pension

A Money Purchase Pension plan is a defined contribution plan in which the company’s contributions are mandatory and are usually based solely on each participant’s compensation. Contributions must be made to a money purchase pension plan even if the company has no profits. Failure to make a contribution can result in the imposition of a penalty tax.

Employee Stock Ownership Plan (ESOP)

An Employee Stock Ownership Plan (ESOP) is a defined contribution plan whose funds must be invested primarily in employer securities. There is not specific percentage requirement, and “primarily” is a flexible term that takes into account facts and circumstances such as the investment performance of the employer securities.


403(b) arrangement, commonly referred to as “tax-sheltered annuities,” are a form of defined contribution plan available only to employees of educational and charitable organizations. As the IRS is looking at these plans more closely now, it is very important that they be tested for compliance.


457 plans are deferred compensation plans under an arrangement between a state or local government or a non-church, non­governmental tax-exempt organization and an individual who performs services for such an entity.

New Comparability

New Comparability Plans are generally profit sharing plans or money purchase pension plans in which the contribution percentage formula for one category of participants is greater than the contribution percentage formula for other categories of participants. A new comparability plan is tested under the cross-testing rules and must contain a definite predetermined formula for allocating contribution made to the plan among the participants.

Cash Balance

A Cash Balance plan is a defined benefit plan that specifies both the contribution to be credited to each participant and the investment earnings to be credited based on those contributions. Each participant has an account that resembles those in a 401(k) or profit sharing plan. These accounts are maintained by the plan actuary, who generates annual participant statements.