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Summary of the Different Qualified Retirement Plans
For comparison and review purposes, here's a brief summary of qualified plans.
Defined Benefit Plan
The purpose is to provide a specified retirement benefit. Employers bear the investment risk. Annual employer contributions can sometimes fluctuate widely and generally must be determined by an actuary or other financial administrator.
Defined Contribution Plan
The purpose is to set aside funds to the individual accounts of participants based on an established contribution formula. Employers are generally committed only to making annual contributions. Plans are often easier to administer than defined benefit plans, and the employees bear all investment risk.
Money Purchase Pension Plan
A defined contribution plan under which employers make annual contributions based on a set percentage of the employee's compensation.
Profit Sharing Plan
A defined contribution plan under which employers base contributions on profits or income, or a determination by the board of directors. The employer is not necessarily obligated to make annual contributions, but contributions must be recurring and substantial.
Employee Stock Ownership Plan (ESOP)
A defined contribution plan in which plan assets are invested primarily in securities of the employer corporation.
Target Benefit Plan
A cross between a defined benefit and a money purchase pension plan. Employers base contributions on a target benefit formula established at the plan's inception, which includes an assumed earnings rate. Because the contribution formula is not adjusted in subsequent years to reflect actual plan earnings, the employee bears all investment risk. Contributions are allocated to separate accounts maintained for each participant.
Fully Insured Plans – Section 412(e)(3) Plan – Formerly Section 412(i) Plans
A defined benefit pension plan funded entirely by annuity contracts or a combination of annuity and life insurance contracts.
SIMPLE Retirement Plan
A plan for employers with 100 or fewer employees. This plan is eligible for simplified nondiscrimination rules (covered in a separate section of this service).
Section 401(k) Plan
A defined contribution plan under which employees or self-employed individuals can make elective deferrals to the plan. Employers may make matching contributions.
Individual 401(k) Plan
A defined contribution plan under which a business owner without eligible employees can make elective deferrals to the plan, as described above, but solely for his or her own benefit (or for a spouse).
Keogh Plan
Any qualified retirement plan maintained by a self-employed person or partnership. Keogh plans may be defined benefit or defined contribution plans.
In this "inventory" of plans, we should also mention two types of plans that are technically not qualified retirement plans, but alternatives to qualified retirement plans:
Simplified Employee Pension (SEP) Plan
A special type of employer retirement plan under which the employer makes contributions to each participant’s separate individual retirement account (IRA), reducing plan administration, recordkeeping, and reporting (covered in a separate section of this service).
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