A profit sharing plan is a type of defined contribution plan that is not a pension plan. The employer’s contribution to a profit sharing plan is not required to be fixed, nor does it need to be tied to profits. While a plan may have a definite contribution formula, many profit sharing plans use a discretionary formula by which the employer determines each year how much to contribute.

While the plan may have discretion in determining the amount of the contribution, the allocation formula must be definite. Allocations may be defined in a variety of ways: pro rata to all participants based on compensation, integrated with Social Security, based on a points system or “cross-tested” based on participant allocation groups, just to name a few. Both for-profit and not-for-profit organizations may adopt profit sharing plans.

A 401(k) plan is a defined contribution plan, typically a profit sharing plan, that contains a cash or deferred arrangement as described in section 401(k) of the Internal Revenue Code. A cash or deferred arrangement is simply an arrangement that allows plan participants to elect to defer a portion of compensation, their elective deferrals, and have it contributed to the plan on their behalf, typically through payroll withholding.

A 401(k) plan may allow participants to elect “Roth” tax treatment of all, or a portion, of their elective deferrals. Under Roth treatment, the elective deferrals are taxable when deferred, as opposed to the pre-tax treatment afforded to traditional 401(k) elective deferrals. If certain requirements are met, these Roth contributions can be distributed tax free in the future.

In addition to making elective contributions, the employer may contribute to the plan by matching all, or a portion, of the elective deferrals or by making non-elective, or profit sharing, contributions to all eligible participants.

403(b) plans are similar to 401(k) plans but are governed by section 403(b) of the Internal Revenue Code. These plans may, or may not, be subject to ERISA, depending on the involvement of the employer in the plan’s operation.

403(b) plans may include contributions in the form of elective deferrals, including Roth elective deferrals (see description of Roth elective deferrals under description of 401(k) plans above), matching contributions or non-elective contributions.

403(b) plans may only be adopted by certain eligible employers. Those employers include 501(c)(3) organizations, educational organizations and states (including political subdivisions or state agencies).

A governmental 457(b) plan is a non-qualified, deferred compensation plan that satisfies the requirements of section 457(b) of the Internal Revenue Code. These plans are also known as an "eligible deferred compensation plans." They may be maintained by a governmental employer (e.g., a state, a political subdivision of a state or any agency or instrumentality of a state or political subdivision of a state). Rollovers are permitted to, or from, governmental section 457(b) plans.

Certain 457 plans that do not meet the requirements of section 457(b) are referred to as “ineligible” 457 plans and are governed by section 457(f) of the Internal Revenue Code. NLG does not administer ineligible 457 plans.

A money purchase plan is a type of pension plan. It is a defined contribution plan that must provide a fixed contribution formula (e.g., the contributions must not be discretionary). The benefits from a money purchase plan must be paid as a joint and survivor annuity, unless the participant (and the participant’s spouse) validly waives this right.

An ESOP is a defined contribution plan and may be a stock bonus plan, or a combinaion stock bonus plan and money purchase plan. The distinguishing feature of an ESOP is that it must be designed to invest primarily in employer securities. In addition to many of the typical defined contribution plan rules, an ESOP must satisfy certain diversification rules, distribution restrictions, allocation restrictions and voting rights requirements. Special rules also apply if the ESOP invests in the securities of an S corporation.

Davis-Bacon (Prevailing Wage) Plans

Davis-Bacon or Prevailing Wage plans are governed by the Davis-Bacon Act (40 U.S.C. §§3141-3148 and 29 C.F.R. Pt. 1-7). This Act requires contractors and subcontractors (employers) to pay wages on federal construction projects equal to the wages paid on similar private construction projects in the project’s locale. This equivalent wage is known as the prevailing wage. This requirement to pay a prevailing wage may be discharged through a combination of cash and fringe benefits, including retirement plan contributions. A Davis-Bacon plan may be a separate plan, or these prevailing wage contributions may be part of another qualified plan arrangement.