401k Retirement Plan Options—Section 125 and More

DEFINED BENEFIT PLANS

Most Fortune 500 companies had this plan type years ago, but many have discontinued these plans in favor of the more popular 401k retirement plans. However, there are still situations where this 401k retirement plan design works very well.

This plan favors employees and owners who are 50 years old, or older. This plan type provides a guaranteed monthly retirement benefit to participants based on the normal retirement age stated in the plan document. The actuarial formulas take into consideration compensation, age, and retirement date. The benefit is defined in the plan document rather than the allocation formula as is the case with Defined Contribution Plans.

Employers considering this retirement plan type should be aware that contributions are mandatory, cost of administration can be significantly higher, an actuary must be engaged for annual certification, and government scrutiny is at a higher level.

SECTION 125 PLANS

This plan is most often referred to as a "Cafeteria Plan". Cafeteria retirement plans are welfare benefit plans specifically authorized by Section 125 of the Internal Revenue Code. It is a way of providing employees with a valuable benefit, where both the employer and employees save significant amounts on taxes.

Generally, employees are given a choice to "redirect" part of their salary. Each employee then uses the "redirected" part of his/her salary to purchase benefits offered by the plan (hence the term "cafeteria").

Employers may make further contributions to the plan (in addition to an employee's own salary redirections), which employees may also use for allowed benefits. Allowed benefits include dependent care assistance, uninsured medical expenses not covered by the group medical plan, group life, medical, and disability premiums otherwise paid by the employee, and contributions to 401k retirement plans.

These plans do require plan documentation, enrollment forms, 5500 series return filed with the IRS annually for plans with 100 or more participants, DOL submission and monthly administration.

NON-QUALIFIED PLANS

A Non-Qualified retirement plan is not required to meet the standards set forth in the Internal Revenue Code as do Qualified Plans and as such are funded with after tax dollars. They represent an opportunity to benefit certain key employees without regard to the anti-discrimination rules set forth in the Internal Revenue Code that govern Qualified Plans funded with pre-tax dollars.

Typically funded with insurance products, they may also employ other investments. These agreements may be structured as trusts or agreements drafted and agreed to by all pertinent parties. These arrangements are often called "Golden Handcuffs", and are very flexible in terms of what types of benefits can be provided. These plans require little or no ongoing administration.