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.