Other Plan Types

403(b) Plans

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 ($19,500/$6,500 catch-up for 2020 and 2021). 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.

ESOPs

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.

All contributions are funded by the employer (employee deferrals not allowed)
With limited exceptions, the plan must cover all employees who are at least 21 years old and who have worked for the employer 3 out of the last 5 years
All contributions must be 100% vested
Plan cannot allow for participant loans
If IRS Form 5305-SEP is used to establish the plan, the employer cannot sponsor any other retirement plan during the same year

SIMPLE IRA

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.

Employees can make pre-tax deferrals through payroll deduction up to a certain dollar amount that is indexed annually ($13,500/$3,000 catch-up for 2020 and 2021); the limits are lower than those available in traditional 401(k) plans
Employer is required to contribute either (1) a matching contribution equal to 100% up to 3% of compensation, or (2) a nonelective contribution equal to 2% of each eligible employee's compensation
With limited exceptions, the plan must cover all employees who are reasonably expected to earn at least $5,000 for the current year and who received at least $5,000 in compensation during either of the last 2 preceding calendar years
Employees must receive an annual notice describing the arrangement
All contributions must be 100% vested
Plan cannot allow for participant loans
The employer generally may not sponsor any other retirement plans (i.e. 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.

Employees can make pre-tax deferrals through payroll deduction up to a certain dollar amount that is indexed annually ($13,500/$3,000 catch-up for 2020 and 2021); the limits are lower than those available in traditional 401(k) plans
Employer is required to contribute either (1) a matching contribution equal to 100% up to 3% of compensation, or (2) a nonelective contribution equal to 2% of each eligible employee’s compensation
No other contributions can be made under the plan
Employees must receive an annual notice describing the arrangement
All contributions must be 100% vested
Plan can allow for participant loans and hardship distributions
Annual Form 5500 must be filed
The employer generally may not sponsor any other retirement plans (i.e. qualified plans)
Plan can be converted (amended) into a traditional 401(k)