401(k) Plans are one of the most popular and effective retirement plans in use today. By offering a tax-advantaged retirement plan such as a 401(k) plan to your employees, you are providing a valuable benefit that may help you retain quality employees.
Under a 401(k) plan, participants can elect to receive part of their compensation as a contribution to a retirement plan. Most 401(k) plans today allow for salary reduction arrangements, in which contributions are directly deposited into the 401(k) plan.
These types of retirement plans offer significant tax benefits to participants, since contributions are treated for income tax purposes as employer contributions and therefore are not included as reportable income.
Employee contributions to a 401(k) are always 100 percent vested, which means that the employee will not lose the benefit if he or she terminates employment. However, employee contributions to a 401(k) plan cannot be distributed without penalty until the employee retires, becomes disabled, dies, or reaches age 59½.
PROFIT SHARING PLAN
A Profit Sharing Plan is a defined contribution plan that allows an employer to have complete discretion in regards to the contributions to the plan.
Participant contributions to the plan are invested and accumulate tax free until distribution to the participants or their beneficiaries upon retirement or occurrence of some other specified event.
Contributions to a profit sharing plan need not be based on profits. In fact, most profit sharing plans have discretionary formulas that permit the employer to reduce or skip contributions in any given year.
EMPLOYEE STOCK OWNERSHIP PLAN (ESOP)
An ESOP is a defined contribution plan that invests primarily in employer securities. The funds are used to buy employer securities from stockholders or from the sponsoring company.
When a participant retires, dies, or terminates employment, the participant receives his or her benefits in the form of cash or employer securities. A participant generally can demand that he or she receive a distribution of employer securities unless specific requirements to the contrary are specified in the plan agreement.
ESOPs offer two considerable benefits to the owners of a closely held company: (1) providing a market for the owner’s closely held stock and (2) keeping the company’s stock in friendly hands in the event of a hostile takeover.