Retirement plans for small businesses in California can vary in this article we want to highlight 6 different retirement plans for small business in California.
Fully Insured Defined Benefit Plan
The 412(e)(3) Fully Insured Defined Benefit Plan is a retirement plan that provides guaranteed retirement benefits to the owners and employees of a company provided annual premium contributions have been funded. The plan is funded solely with life insurance and annuities, or annuity-only contracts, offering minimum guaranteed interest rates.
Defined Benefit Plan
The Defined Benefit Plan is a retirement plan that provides guaranteed retirement benefits to the owners and employees of a company provided annual premium contributions have been funded. The plan may be funded with, but not limited to, life insurance and annuity contracts.
Cash Balance Plan
A Cash Balance Plan is a defined benefit plan that provides benefits to participants in the form of hypothetical account balances normally stated as a dollar amount or a percentage of compensation. Each year, eligible participants receive their benefit in the form of a pay credit and an interest credit that is added to their hypothetical account. However, the plan is still funded like a traditional defined benefit plan with funds going into a pooled account.
401(k) Profit Sharing Plan
A 401(k) Profit Sharing Plan allows employees to defer a portion of their income (tax-deferred) to the plan while also allowing the employer to fund a matching and/or discretionary contribution. The salary deferrals are always 100% vested. They are limited to the lesser of 100% of the employee’s compensation or the current year’s dollar limit. Participants age 50 or older may make an additional “catch-up” deferral. These thresholds are adjusted annually for cost-of-living increases.
A matching contribution by the employer may be included based on the salary deferrals. The matching allocation formula varies according to the employer’s funding objectives and may be discretionary. Highly compensated employees’ deferrals may be limited and retirement benefits are impacted by investment returns. 401(k) Plans also must satisfy nondiscrimination testing requirements.
Safe Harbor 401(k) Profit Sharing Plan
The Safe Harbor 401(k) Profit Sharing Plan is designed to eliminate the nondiscrimination testing imposed by traditional 401(k) Plans and allow every participant, including the owners, to defer up to the maximum limits. In order to maintain the “safe harbor” status, the employer must make a 100% vested “safe harbor” contribution with one of the following two options: a 3% of compensation contribution to all eligible employees or a matching formula equal to 100% of salary deferrals up to 3% of compensation and 50% of salary deferrals between 3 and 5% of compensation. Retirement benefits are impacted by investment returns.
Profit Sharing Plan
A Profit Sharing Plan is a defined contribution plan in which the employer makes discretionary contributions. A key advantage is flexibility in determining the annual contribution. The maximum annual employer deduction for contribution is 25% of eligible compensation. There is also a maximum individual contribution limit. The individual limits are adjusted annually for cost-of-living increases.