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In Plan Perfect, retirement plans fall into one of two categories: Defined Contribution Plans and Defined Benefit Pension Plans.
Defined Contribution Plans, also known as retirement savings programs, cover a broad range of programs such as Profit Sharing and 401(k) plans. These types of programs allow owners and employees to make contributions that are allocated to individual participant accounts. They generally favor younger employees who have a longer time horizon until retirement.
Defined Benefit Pension Plans promise participants a specific monthly lifetime benefit amount at retirement. Contribution amounts are calculated and adjusted annually to ensure that the target goal is reached. Contributions for all the plan participants are kept in a single account or “pool” that is used to pay the promised benefits. These types of plans tend to favor older, long-service, highly compensated business owners, partners, and key employees who are in their peak earning years. They offer a way to quickly increase retirement plan assets.
A Combination Plan, aka “Combo Plan”, combines a Defined Contribution (401(k) and Profit Sharing) Plan and a Defined Benefit Pension Plan, allowing the plan sponsor to offer a two-fisted approach to saving for retirement. This hybrid design can substantially increase the annual maximum dollar amount allocated to an individual compared to a stand-alone profit-sharing plan. Combining these plans allows you to maximize the benefits for owners and highly compensated employees and, at the same time, provide a minimum type of benefit formula to younger employees.
Combo plans are best suited to the following circumstances:
Under the right circumstances, Combo plans can produce dramatic tax savings for the employer and allow the business owner and/or key employees to receive significant retirement benefits.
Check out our other retirement planning services and plans for planning a perfect retirement. For more information please read our FAQs about retirement plans, and if you still have further questions, feel free to contact us. You can also contact Sheree Tallerman, the CEO of PlanPerfect, Inc., at 949-223-8397 or [email protected].
