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Corporations: Choosing a Defined-Contribution Plan for Employees

At some point, most corporations have to decide upon the best retirement plans for their employees. In general, they have to choose between four different types:  defined-contribution or defined-benefit plans -- or qualified and nonqualified plans.                                         

The defined-contribution plan is one involving “a certain amount or percentage of money [that’s] set aside each year by a company for the benefit of the employee.” Certain restrictions dictate how the money can be withdrawn without any penalties.

Employees often like having a defined-contribution plan because they have significant control over the types of investments in their accounts. For example, an employee’s defined contribution plan might include some company stock, mutual funds, bonds, and other investment tools.

These types of programs are often referred to as 401(k) s, 403(b) plans and 457 plans. Those names refer to the specific sections of the Internal Revenue Code which govern them.            

Here’s some additional information about these plans, including their positive and negative attributes.                                                                 

General Information/Advantages and Disadvantages of Defined-Contribution Plans

  • Probably today’s most common type of employee retirement account. These have become very popular during recent decades -- about half of all American workers have a 401(k), 402(b) plan or a 457 plan;

  • The most common types of these plans now involve savings and thrift-type programs, as opposed to profit-sharing plans;

  • They provide for an annuity upon retirement. Unlike defined-benefit plans, defined-contribution plans offer employees an annuity when they retire. Unfortunately, this means they may not be as safe as defined-benefit plans since the employees could lose money over time due to a poor combination of assets. Some employees try to minimize this drawback by buying annuities when they retire;

  • Taxes aren’t due immediately. No one has to pay taxes on the contributions to these plans at the time they’re made. However, when employees retire and begin withdrawing funds from these accounts, that’s when they must pay taxes [unless they’ve chosen Roth 401(k) plan contributions which are taxed when money is placed into them, not when it’s withdrawn];

  • When funds can be withdrawn. In general, employees cannot withdraw funds from these accounts before they turn age 59. However, there are exceptions to this general rule. For example, a covered employee can withdraw funds prior to age 59 if s/he is buying a first home or needs to pay medical or education expenses.  (Note: Some tax penalties may still apply even when these types of permitted withdrawals are made).

To obtain help with handling all of your Georgia business planning needs, please contact the Law Offices of Shane Smith today.  You can schedule your free initial consultation with a knowledgeable Peachtree City estate planning attorney by calling: (770) 487-8999.


Shane Smith
Advocate for the Seriously Injured in Georgia