Retirement Plan Information

401(k) Plans
New Comparability Plans
Defined Benefit/Cash Balance Plans
Defined Benefit/Defined Contribution Combo Plans

401(k) Plans Top


A 401(k) plan is a qualified plan that includes a feature allowing an employee to elect to have the employer contribute a portion of the employee’s wages to an individual account under the plan. Generally, deferred wages (elective deferrals) are not subject to federal income tax withholding at the time of deferral, and they are not reported as taxable income on the employee’s individual income tax return.

401(k) plans are permitted to allow employees to designate some or all of their elective deferrals as “Roth elective deferrals” that are generally subject to taxation under the rules applicable to Roth IRAs. Roth deferrals are included in the employee's taxable income in the year of the deferral.

Tax advantages

Two of the tax advantages of sponsoring a 401(k) plan are:

Employer contributions are deductible on the employer’s federal income tax return to the extent that the contributions do not exceed certain IRS limitations.

Elective deferrals and investment gains are not currently taxed and enjoy tax deferral until distribution.

Types available

There are several types of 401(k) plans available to employers. The most common are:

Traditional 401(k) plans, and

Safe harbor 401(k) plans,.

Different rules apply to each. For tax-favored status, a plan must be operated in accordance with the applicable rules. Therefore, it is important that the employer be familiar with the special rules that apply to its plan so the plan is administered in accordance with those rules. To qualify for the tax benefits available to qualified plans, a plan must both contain language that meets certain requirements (qualification rules) of the tax law and be operated in accordance with the plan’s provisions. The following is a brief overview of important qualification rules. It is not intended to be all-inclusive.

Traditional 401(k) plans

A traditional 401(k) plan allows eligible employees (i.e., employees eligible to participate in the plan) to make pre-tax elective deferrals through payroll deductions. In addition, in a traditional 401(k) plan, employers have the option of making contributions on behalf of all participants, making matching contributions based on employees’ elective deferrals, or both. These employer contributions can be subject to a vesting schedule which provides that an employee’s right to employer contributions becomes nonforfeitable only after a period of time, or be immediately vested. Rules relating to traditional 401(k) plans require that contributions made under the plan meet specific nondiscrimination requirements. In order to ensure that the plan satisfies these requirements, the employer must perform annual tests, known as the Actual Deferral Percentage (ADP) and Actual Contribution Percentage (ACP) tests, to verify that deferred wages and employer matching contributions do not discriminate in favor of highly compensated employees.

Safe harbor 401(k) plans

A safe harbor 401(k) plan is similar to a traditional 401(k) plan, but, among other things, it must provide that the safe harbor contributions are fully vested when made. These contributions may be employer matching contributions, limited to employees who defer, or employer contributions made on behalf of all eligible employees, regardless of whether they make elective deferrals. The safe harbor 401(k) plan is not subject to the complex annual nondiscrimination tests that apply to traditional 401(k) plans.

Employers sponsoring safe harbor 401(k) plans must satisfy certain notice requirements. The notice requirements are satisfied if each eligible employee for the plan year is given written notice of the employee's rights and obligations under the plan and the notice satisfies the content and timing requirements. The employer must provide this notice at least 30 days and not more than 90 days before the beginning of each plan year.

Both the traditional and safe harbor plans are for employers of any size and can be combined with other retirement plans.

New Comparability Plans Top

A new comparability plan is a 401(k) plan that allows a plan to provide higher allocations to certain groups of participants who are generally older than the plan population as a whole. This is possible because the plan uses a testing method that assumes than older participants have less time for their contributions to grow before they need to withdraw them from the plan for retirement.

The advantage of new comparability plan is that it permits substantially larger contributions to be made for older participants than for the younger participants. In some situations, the employer might be able to make a 20% contribution for certain older employees and only a 5% contribution for all other employees.

Defined Benefit/Cash Balance Plans Top


Defined benefit plans provide a fixed, pre-established benefit for employees at retirement. On the employer side, businesses can generally contribute (and therefore deduct) more each year than in defined contribution plans. However, defined benefit can provide larger benefits to business owners but are more costly to establish and maintain than other types of plans.

Participants do not have separate accounts in a defined benefit/cash balance plan. The participant does not have any right to the underlying assets related to his/her benefit.

"Traditional" defined benefit plans

A "traditional" defined benefit plan promises a certain level of benefit to be paid at normal retirement age (generally age 65). This formula is generally expressed as a fixed percentage of average annual compensation times years of benefit service. The amount of the benefit is payable at normal retirement (generally age 65) in the form of an annuity.

Cash balance defined benefit plans

A cash balance formula resembles that of a profit sharing plan. However, a cash balance plan formula is used solely for calculating the participant's benefit. Cash balance plans generally provide that each participant will be provided with a hypothetical account. Each year the plan sponsor will make a bookkeeping entry in the account equal to a stated percentage of each eligible participant's compensation for that year. In addition, the sponsor will make an entry in the bookkeeping account equal to a predetermined fixed or market rate of return. Each participant will be eligible to receive an annuity at normal retirement age equal to the actuarial equivalent of the balance of the hypothetical account. A cash balance plan will also generally permit each participant to receive the balance in his/her hypothetical account as a lump sum distribution.

A cash balance plan is subject to the defined benefit funding rules so the amount that must be contributed to the plan each year is based on complicated rules that are only indirectly related to the changes in the balance of the hypothetical account.

Cash balance plans are popular because they are easy to understand and because the contribution/benefit limitations are higher due to the fact that they are subject to the defined benefit rules. These features are especially appealing to older highly compensated business owners.

Who contributes

Generally, the employer makes most contributions. Infrequently, employee contributions are required or voluntary contributions may be permitted.


All defined benefit plans are subject to complex funding rules. These rules give a plan sponsor a certain amount of flexibility in funding a defined benefit plan. The funding requirements and benefit calculations are performed each year by a enrolled actuary.

In general, the maximum deduction and benefit limitations are higher for defined benefit plans than for defined contribution plans. In addition, the minimum top-heavy benefit is more valuable in a defined benefit plan than in a defined contribution plan.



Substantial benefits can be provided and accrued within a short time - even with early retirement

Employers can contribute (and deduct) more than under other retirement plans

Plan provides a predictable benefit

Benefits are not dependent on asset returns


Most costly type of plan

Most administratively complex plan

An enrolled actuary must be hired

Defined Benefit/Defined Contribution Combo Plans Top

A defined benefit/defined contribution combo plan (a combo plan) is a cash balance plan and a 401(k) plan that are paired in a highly coordinated way.

A combo plan is the best available way to provide maximum benefits in the shortest amount of time at the lowest cost.