An S-Corporation is a legal entity in which all profit and loss flows through to the business owner. The corporation may provide benefits to its employees, however, like any other corporate structure. Company retirement plans give employees the opportunity to save money with their employer and potentially take advantage of an employer matching contribution if the plan allows it.
A SEP is a simplified employee pension plan. These plans are simplified versions of retirement pensions. They carry a low cost for the business, but allow the company to contribute money toward the employee's retirement. The company makes contributions to the account based on its ability to do so. Contributions are not required but when they are made, every employee must be treated the same. This means the contribution formula must be the same for all employees.
A SIMPLE IRA is a savings incentive match plan for employees. This plan requires the S-Corporation to make contributions to the employee's account on a $1 for $1 basis up to 3 percent of the employee's income. Alternatively, the corporation may make a non-elective deferral of 2 percent of the employee's annual compensation.
A 401k plan is a defined contribution plan. These plans may be funded by the employee, the employer or both. Contributions made by the employer must be fair and equal for all employees, using the same contribution formula for all employees. Employers are not required to make contributions to 401k plans.
A defined benefit plan is a true pension plan. The plan is funded by the employer. The S-Corporation must make contributions to the plan every year. These contribution amounts must be enough to meet the promises of the plan. Some plans require the services of an actuary, which is a professional mathematician. These actuaries figure out how much money is required to meet certain promises. Since the plan promises a specific benefit, the plan may need to be fully or at least partially insured. This means the plan must invest in fixed interest life insurance and annuity policies.
- "Practicing Financial Planning for Professionals (Practitioners' Edition), 10th Edition"; Sid Mittra, Anandi P. Sahu, Robert A Crane; 2007