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What are the differences between employer sponsored retirement plans?

Take a brief look at the differences between various employer-sponsored retirement plans.

For many Americans, saving for retirement is an important, long-term goal. To encourage such savings, federal income tax law provides for a number of tax-advantaged retirement saving plans. Some of these plans, including traditional Individual Retirement Accounts (IRAs) and Roth IRAs, are available to individuals with earned income. Other types of plans are set up by a firm for the benefit of the firm’s employees. The table below summarizes how some of the key “employer-sponsored” plans work and illustrates the differences between them.

Plan Type Defined Benefit Defined Contribution
Benefit or Feature Defined Benefit Plan Nontraditional Defined Contribution Plan 401(k)  

SEP IRA

(Simplified Employee  Pension)

Plan SIMPLE IRA

(Savings Incentive Match Plan for Employees)

Employer contributions deductible to employer? Yes Yes Yes Yes Yes
Employer contributions currently taxable to participant? No No No No No
Earnings accumulate income tax deferred? Yes Yes Yes Yes Yes
Contribution benefit base is total compensation up to $285,000? Yes Yes Yes Yes Effectively, $450,000 footnote [1]
Maximum employer annual contribution/deduction: Determined by actuary 25% of covered payroll 25% of covered payroll excluding deferral, if plan specifies Annual contributions by employer to employee's IRA can't exceed lesser of 25% of compensation or $57,000 for 2020 ($56,000 for 2019.)

Note: All contributions are funded by the employer.

Match up to 3% of covered payroll or 2% of covered payroll to all eligible employees
Employer contributions required? Yes Money purchase – yes 

Profit sharing - no

No All contributions are funded by the employer.
Yes at 2% of covered payroll to all eligible employees 

OR 

Dollar for dollar match up to 3% of compensation

Employer contributions discretionary? No Profit sharing - yes Yes footnote [2] Yes No
Voluntary employer matching contributions allowed? N/A N/A Yes N/A No footnote [3]
Employee contributions 

Required? 

Permitted?

No

Rarely

No

Rarely

Maybe footnote [3]

Yes

No

No

No

Yes

Maximum participant benefits (defined benefit plans only) Lesser of 100% of compensation or $230,000 footnote [4] annually N/A N/A N/A N/A
Maximum participant allocations (employer and employee) (defined contribution plans only) N/A Lesser of 100% of compensation or $57,000 footnote [4] Lesser of 100% of compensation or $57,000 footnote [4] Lesser of 100% of compensation or $57,000 footnote [4] Lesser of 100% of compensation or $27,000 footnote [5]
Catch-up provisions for those age 50 and older N/A No Yes $6,500 footnote [4] N/A Yes $3,000 footnote [4]
Can exclude employees from plan participation on basis of age, length of service, or union membership? Yes Yes Yes Yes No
($5,000 income test applies)
Investments

Self directed by participants or can be invested at participant discretion (most plans impose some practical considerations) 

and/or 

Directed by the trustee, must be diversified and prudent


N/A


Yes


Yes


Yes


Yes


Yes


Yes


Yes

 
 
Yes


N/A

How much will there be at retirement?

Benefits specified in plan? 

Investment return affects retirement benefits? 

Benefits guaranteed at retirement?


Yes

No

Yes


N/A

Yes

No


N/A

Yes

No 


N/A

Yes

No

 
 
N/A

Yes

No 

Who bears investment risk? Employer Employee Employee Employee Employee
Ease of understanding by participants Difficult Difficult to Easy Easy Easy Easy
Can life insurance be provided? Yes Yes Yes No No
Can participants have a traditional, deductible IRA, or a Roth IRA, subject to income level limitations based on filing status? Yes Yes Yes Yes Yes
Forfeitures are used to: Reduce employer contribution Reduce employer contribution or are reallocated among participants Reduce employer contribution or are reallocated among participants N/A N/A
Can participants take loans subject to strict rules? Yes Yes Yes No No
Are hardship withdrawals permitted under well-defined circumstances?  (Participant cannot defer for 6 months thereafter.) N/A N/A Yes N/A N/A

return to reference [1] The $450,000 amount is based on 3% of the 2020 contribution limit of $13,500 (or $13,500 divided by .03).

return to reference [2] Top-heavy minimum employer contribution may be required.

return to reference [3] The employer is required to contribute, using one these two methods: (1) at 2% of compensation to all employees, or (2) a dollar-for-dollar match, up to 3.0% of compensation.

return to reference [4] Applies to 2020.

return to reference [5] For 2020, includes a maximum employee contribution of $13,500, plus a dollar for dollar employer match.

These materials were reproduced with the permission of Advisys, Inc. No State Farm® entity prepared these materials nor does State Farm represent or warranty the opinions or statements expressed therein. These materials are being provided for information purposes only.

Neither State Farm nor its agents provide tax or legal advice.



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