Defined Benefit Pension Plans
Benefits are determined by formula at retirement or termination. These plans favor older, higher compensated participants.
Defined Contribution Plans
Each year's contribution or the allocation of each year's contribution is defined. Account balances are maintained. Basically, there are two types of Defined Contribution Plans:
Profit Sharing Plans
Profit sharing plans have discretionary contributions which may range from 0% to 25% of covered compensation. Examples of contribution allocation formulas are:
- Traditional: The contribution is allocated in proportion to compensation.
- Integrated with Social Security: slightly favors higher-compensated participants.
- New Comparability (Owner-Weighted): favors the principals of the business.
401(k) Plans
A special type of profit sharing plan that allows (but does not require) employees to contribute to the plan on a pre-tax basis.
Cafeteria Plan
An employee is permitted to pay certain expenses on a pre-tax (rather than an after-tax) basis. Typical expenses that an employee can convert to a pre-tax basis include: employee-paid medical care insurance premiums, dependent (child or parent) care expenses, and expenses not covered by the Company's health plan, such as deductibles, co-insurance, eyeglasses, dental and orthodontic expenses.
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