Retirement Proposal Plan

The design of a company's benefits program is important to ensure the plans fit the structure of the company and the needs of its employees. Being a new company starting with 150 employees it will be important to design a varied and comprehensive retirement program that will not only address the needs of the company's current employees, but will also attract potential employees, and be affordable for the company.

Qualified plans "entitle employers and employees to substantial tax benefits" (Martocchio, 2009, p. 3), because neither has to pay taxes on contributions within a dollar limit outside of defined contribution plans. As an additional benefit, investment earnings are tax free and participants and their beneficiaries do not pay taxes on retirement benefits until the funds are received.

There are two types of qualified retirement plans: defined benefit plan and defined compensation plan. A challenge of the defined benefit plan is that it may prove to be more costly for employers as employer contribution rates fluctuate yearly and requirements may be difficult for employers to ensure all the funds are available for participants or beneficiaries to receive.

In this case, the best retirement benefit design option is the defined contribution plan. Under the defined contribution plans "employers and employees make annual contributions to separate accounts established for each participating employee, based on a formula contained in the plan document" (Martocchio, 2009, p. 7). The defined contribution plan normally calls for the employer to contribute a set percentage of each participating employee's compensation annually. Based on the benefit and contribution limits, employers are limited to the percentage amount contributed to the defined contribution plan. Employers invest funds on behalf of the employee from an array of investment options, such as stocks, bonds, and market funds (Martocchio, 2009, p. 7). Being a newly operational and small company, investment options should be limited to employer choice based on fiduciaries reports.

A popular type of defined contribution plan is a 401K which allows employees to "defer part of their compensation to the trust of a qualified defined contribution plan" (Martocchio, 2009, p. 7). 401K plans popular because of the several benefits offered to employers and employees. First, income tax is not paid on contributions until the employee withdraws the fund; second employers contributions are deducted from taxable income, and finally, gained investments are not taxed until a participant's funds are received.

Profit-sharing is used to distribute money to employees through a pool that is funded by gross company sales or another basis (Martocchio, 2009, p. 8). One of three formulas can be used to establish employer contribution percentage. A "fixed first- dollar-of-profits formula uses a specific percentage of either pretax or after-tax annual profits contingent upon the success of a company's goals" (Martocchio, 2009, p. 9), a graduated first-dollar-profit formula shares a specified percentage of the company's profits, and finally the profitability threshold formulas fund profit sharing pools only if a profits go above a set minimum level, but below a maximum amount.

Allocation of profit-sharing funds can be equally paid out regardless of employee contribution or level in the company, based on employee's annual salary, or based on employee contribution. Being a new company with a small number of employees, the best allocation method may be to equally pay out employees to promote employee motivation to reach the company goals, thereby assisting in increase sales and profits.

Both benefit plans meet requirements of the ERISA by allowing all employees to contribute after a year of service and completed work hours. In addition, information

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