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403(b) plans are very similar to 401(k) plans but are offered by public schools and certain tax-exempt entities. Employees can contribute a portion of their wages to the plan on a tax-deferred basis (403(b) deferrals). These deferrals are subject to the same limitations as 401(k) plans ($19,000/$6,000 catch-up for 2019). Employers can also make contributions; however, 403(b) plans are generally exempt from certain discrimination testing requirements if the employer does not make contributions to the plan. There is great flexibility in how these types of plans can be designed, and they can include many of the same features as 401(k) plans.
Davis -Bacon/Prevailing Wage Plans
A Davis-Bacon Plan is either a money purchase or profit sharing plan established to satisfy part of the prevailing wage requirement for federal public works projects. The profit sharing plan design may incorporate a 401(k) feature and may provide for regular profit sharing contributions to be offset by the prevailing wage contributions.
Employee Stock Ownership Plans (ESOPs) are plans that are designed to invest primarily in qualifying employer securities. In some ways, they are similar to profit sharing plans; however, the employer makes contributions to the plan in the form of shares of its own stock rather than cash. Contributions are tax-deductible, within certain limits. In addition, ESOPs can be “leveraged” which means that the ESOP finances the purchase of stock through debt obtained by the employer. They are a vehicle that is used to incentive employees by allowing them to share in the ownership of the company.
Money Purchase Pension Plans
Money purchase pension plans are plans that provide for a fixed annual employer contribution (typically, a percentage of compensation). They are similar to profit sharing plans; however, they are subject to certain funding requirements and distribution restrictions. Unlike profit sharing plans, employer contributions are mandatory. Historically, they were often coupled with a profit sharing plan so that the employer could maximize contributions; however, they have significantly declined in popularity over the last decade due to changes in the deduction limit for employer contributions.
Simplified Employee Pension ("SEP IRA")
A SEP IRA is a simplified retirement plan that is most commonly used by small employers, although it can be used by businesses of any size. It allows employers to make a discretionary contributions on behalf of eligible employees up to 25% of pay, is easy to establish, does not require an annual Form 5500 filing, and has low administrative costs. However, it lacks the flexibility found in qualified plans, and the drawbacks often exceed the benefits for most employers.
A SIMPLE IRA is similar to a SEP IRA in that it is commonly used by small employers (generally, employers with 100 or less employees). Unlike a SEP IRA, the employer is required to make a contribution to the plan each year and employees may also contribute to the plan on a tax-deferred basis. It is easy to establish, does not require an annual Form 5500 filing, and has low administrative costs, but it also lacks the flexibility found in qualified plans.
SIMPLE 401(k) Plan
A SIMPLE 401(k) plan is similar to a SIMPLE IRA; however, the SIMPLE 401(k) plan is a qualified plan. SIMPLE 401(k)s are available for small employers (generally, employers with 100 or less employees) and are exempt from certain nondiscrimination testing requirements. They have more flexibility than SIMPLE IRAs but still lack key features found in traditional 401(k) plans.