This plan allows employees to elect to contribute a portion of their compensation on either a pre-tax or after-tax basis. Employers may also contribute to the 401(k) plan by matching all, or a portion, of the employee's contribution.
Defined benefit plans are based on fixed formulas, and each plan must define how benefits are earned under its specific formula. These have a specified retirement age (rather than a traditional account balance), and at such time, a pension becomes available to employees. In recent years, these plans have become very popular for small business owners, as they allow for high tax-deductible contributions compared to other retirement plans.
While cash balance plans are a type of defined benefit plan, they better describe the manner in which benefits are earned. Also, the contribution formulas can be tiered – meaning benefits can be tailored to different amounts for different groups of employees. Cash balance plans are the single fastest growing retirement plan, and are especially appealing to small business owners.
A profit-sharing plan can stand alone, or it can be part of a 401(k) plan. Profit-sharing plans do not require fixed contributions from employers; but rather, discretionary. This allows them to determine - year by year - how much to contribute.
Money purchase plans have required contribution percentages for employers. An employee's benefits are then based on the contributions - as well as, gains and losses - to their account at the time of retirement.
Similar to a 401(k), however, this retirement plan is offered by educational and other tax-exempt organizations. In a 403(b), both employees and employers can contribute to accounts.
Similar to a 401(k) plan, however, this retirement plan is offered to state and local government employees: police officers, firefighters, and other civil servants. In addition, some highly-paid executives for nonprofits such as hospitals, charities, and unions are also offered 457 plans.
An ESOP is primarily designed to invest in qualifying employer securities.