Comparison of Tax-Qualified Retirement Plans

The most common types of tax-qualified Retirement Plans adopted by small-to medium-size employers are Profit Sharing Plans, 401(k) Plans, Defined Contribution (Money Purchase) Pension Plans, and Defined Benefit Pension Plans. All such Plans share the basic attributes of tax-deductible employer contributions and tax-deferred earnings on the funds deposited, so long as all applicable rules and limitations are observed. Funds are taxed later when withdrawn - after retirement, death, permanent and total disability, or other termination of employment. Employees become Plan participants on the basis of the eligibility requirements established in the pertinent Plan document(s).

Deposits to a Profit
Sharing Plan can
range from 0% to 25%
of compensation, and
the percentage can
vary on a year-to-year
basis.

The following describes the differences among the types of Plans discussed:

Profit Sharing Plan
Deposits to a Profit Sharing Plan are discretionary. They can range from 0% to 25% of aggregate includable compensation of covered participants, and the percentage can vary on a year-to-year basis. The maximum permissible contribution for any one individual for 2007 is $45,000, up from $44,000 for 2006.

In addition to
allowing for employer
contributions, the
401(k) Plan permits
employees to make
tax-deductible
deposits on a "salary
reduction" basis.

401(k) Plan
This is actually a variety of a Profit Sharing Plan. In addition to allowing for employer contributions, it permits employees to make tax-deductible deposits on a "salary reduction" basis, assuming that either the applicable "non-discrimination" rules are met or a minimum "Safe Harbor" contribution is made. The regular salary reduction contribution limit is $15,500 for 2007, up from $15,000 for 2006. For participants over age 50, the limit is $20,500 for 2007, up from $20,000 for 2006. Employers may choose to "match" all or a portion of the salary reduction contribution. The 2007 annual contribution limitation per participant, including both the salary reduction allocation and any employer contribution, is the lesser of 100% of includable compensation or $45,000 (up from $44,000 for 2006). For those at least age 50, the contribution limit for 2007 is $50,000.

Contributions to the
Defined Contribution
Pension Plan are
based solely upon
a designated
percentage of current
compensation.

Defined Contribution ("Money Purchase") Pension Plan
Contributions to this type of plan are based solely upon a designated percentage of current compensation. The ultimate accumulation of funds for retirement is determined by the level of contributions and the earnings actually generated. The Plan includes a specific contribution formula, which represents a fixed commitment of the sponsoring employer. The maximum permissible contribution for 2007 is $45,000 per participant, up from $44,000 for 2006. (Prior to 2001, a primary advantage of this type of Plan was its 25%-of-compensation deduction limit, compared to 15% of compensation for Profit Sharing Plans. However, as of 2001, the limit for Profit Sharing Plans was increased to 25% of compensation, putting such Plans on an equal footing with Defined Contribution Pension Plans.)

The Defined Benefit
Pension Plan favors
older employees.

Defined Benefit Pension Plan
This type of Plan is inherently different from all of the others mentioned, in that contributions are determined by a formula which relates to the providing of a designated level of monthly income at retirement, as well as including current and past compensation levels of participants and a number of actuarial assumptions. This type of Plan favors older employees, in that the fewer the number of years to retirement, the higher the permissible annual deposit. The maximum annual benefit for 2007 is the lesser of 100% of includable compensation or $180,000, up from $175,000 in 2006.

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