PLAN TYPES

Defined Contribution Plans

The defined contribution family of plans is also referred to as individual account plans.  A separate accounting is kept for each participant's funds in such a plan.  Each participant's account is credited with investment earnings.  The term "defined contribution" refers to the fact that the amount of the plan contributions are known (thus "defined").  The ultimate retirement benefit is unknown, because it is determined by the accumulated value of the contributions and investment earnings.  The defined contribution family of plans includes:

1.  Profit sharing plans
2.  401(k) plans
3.  Employee stock ownership plans (ESOP's)
4.  Money purchase plans
5.  Target benefit plans

Defined Benefit Pension Plans

The defined benefit family of plans are the traditional pension plans.  Under these plans, a specific monthly benefit is paid at retirement (the "defined benefit").  Usually, the monthly benefit is based an employee's pay and years of service (for example, a monthly retirement benefit equal to 1.5% of pay multiplied by years of service).  With these plans, the unknown factor is the required annual employer contribution, which is actuarially determined.  These plans require a fixed obligation for employer contributions to provide the promised retirement benefits.  The defined contribution family of plans includes:

1.  Traditional defined benefit pension plans
2.  Cash balance defined benefit plans - a hybrid defined benefit plan, that exhibits some defined contribution-like features 

Section 125 (Cafeteria) Plans

Section 125 Plans, also known as cafeteria plans, provide a vehicle for employees to use pre-tax dollars (via payroll deduction) to pay for certain benefits.  Section 125 payroll deductions are not subject to Social Security or Medicare taxes, so the cost savings inure to both the employee and the sponsoring employer.  Some of the benefits available under these plans include: 

1.  Health and accident insurance premiums
2.  Group term life insurance premiums
3.  Certain other insurance account premiums
4.  Medical expense reimbursement (flexible spending accounts)
5.  Dependent care expense reimbursement

Other Plans

Other types of plans include:

1.  Simplified employee pension plans (SEPs)
2.  SIMPLE IRAs
3.  403(b) plans
4.  457 plans
5.  Non-qualified plans

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