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Sponsoring an employee benefit plan will help your Company
stay competitive in the labor market and reward your employees
for faithful service, as well as provide an incentive for
efficient and conscientious work. It can be confusing and
difficult to decide what type of plan will benefit your Company
the most. This is a brief guide to explain the different types
of employee benefit plans.
Qualified retirement plans are Congressionally approved retirement
plans which have several major tax benefits:
- The employer's contributions can be deducted for income
tax purposes.
- The earnings on the plan's investments accumulate on a
tax-deferred basis.
- When the funds are distributed at retirement age, they
may be eligible for favorable tax treatment.
- Taxpayers may be in a lower income tax bracket after retirement.
Employee benefit plans can first be divided into two main
categories: defined contribution (DC) and defined benefit
(DB) plans. Defined contribution plans are characterized by
the initial contribution allocation to the plan. In a defined
benefit plan, the benefit that will be made available to a
participant upon retirement, death or disability is stated
in the plan document.
There is no "best" type of plan. You have the choice
of several different plan types and your decision should be
based on both your own personal goals and available cash flow.
The questions listed below will help you identify what type
of plan will best suit your company.
Are you looking for a
plan which will vary the plan contributions according to company
profits and be payable to the participants upon retirement?
Do you want your employees to be
able to defer a portion of their income into a tax-deferred
account?
Are you interested in funding your
plan with Company stock or would you like to be able to allow
your employees to purchase Company stock with their own before-tax
contributions?
Would
you prefer to establish a defined benefit plan, with the intention
of the plan providing participants with a specific "target"
amount of money at retirement?
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