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Employer-sponsored retirement plans provide value to employers and their employees. They give employers a distinct advantage in attracting and retaining quality employees, and they provide employees with a convenient way to save for retirement. More importantly, employer-sponsored plans offer employers and employees who participate significant tax advantages.
There are a number of plan types available. Below are highlights of some of the more popular types that companies may offer. For employer and participant contribution information, review the 2008 contributions table.
Retirement plans that meet certain requirements under section 401(a) of the Internal Revenue Code are considered qualified retirement plans. Employer contributions are tax-deductible and may be subject to vesting schedules. Participant contributions are always immediately vested. All contributions (employer and participant) and earnings are tax-deferred until they’re withdrawn.
Employers offering qualified plans also take on specific fiduciary responsibilities. There are reporting and disclosure requirements. Plans also require an annual Form 5500 filing with the Department of Labor, supplying participants with a summary of plan provisions and an annual diversification notice. The investments must be selected prudently and periodically reviewed.
Are you aware of your legal responsibilities? Are you satisfying them?
Review the Fiduciary Responsibility Success Quiz so that you can grade the job you are doing—it may point out where you need to improve. Take the test. For a 15-minute commitment, you should be able to improve the performance of your plan, increase the quality of your employees' benefits (as well as your own) and better protect yourself from fiduciary liability. If you have questions about your responsibilities, please contact us for assistance.
A 401(k) plan can help lay the groundwork for a comfortable retirement. By making pretax contributions, participants have an opportunity to reduce their current taxable income while saving for retirement. By making Roth after-tax contributions, participants will have more money available at retirement. Some companies provide a matching contribution as an extra incentive for the participants to contribute. In-service distributions for certain hardships can be allowed, or participants can take in-service distributions at age 59–1/2.
Participant deferrals do not count toward the deductible limits. Matching contributions may be subjected to a vesting schedule. Both participant and employer-matching contributions are subject to discrimination testing.
A money purchase plan is a pension plan that has a mandatory annual contribution. Company contributions can be as high as 25% of covered pay. The contribution formula is set by the plan terms. Contributions can be subjected to a vesting schedule. In-service distributions are generally not available until a participant reaches the plan's normal retirement age.
A profit-sharing plan is popular because contributions are discretionary and can be tied to profits. Up to 25% of covered pay can be contributed each year. In-service distributions can be made available after five years of participation or when the participant reaches age 59–1/2. Hardship withdrawals are also available.
A Defined benefit plan targets a specific amount of income at retirement. For example, 75% of salary at age 65. Employer contribution is limited to the amount necessary to fund the future benefit. No individual accounts are set up and the plan must tested annually to specify employer funding requirements.
A 403(b) is a tax-favored retirement plan for employees of school systems, nonprofit hospitals, religious organizations and other tax-exempt employers [known as 501(c)(3) organizations]. Organizations can make defined, match or a combination of defined and matched contributions to employees accounts. Similar to a 401(k) plan, participant pretax contributions are 100% immediately vested, but employer contributions may be subjected to a vesting schedule.
A SEP offers many of the tax benefits of the qualified plans, but it has fewer of the administrative expenses associated with them.
SEP contributions are discretionary and can be up to 25% of pay for each eligible employee. Except for grandfathered SARSEPs, participant contributions are not allowed. All employer contributions are made to IRAs for the benefit of the eligible employees and are 100% immediately vested. Contributions and earnings grow tax-deferred until the money is withdrawn by the participant.
A SIMPLE IRA is a retirement plan for small businesses. The company must either match participant contributions (dollar for dollar up to 3% of pay) or make a contribution of 2% of pay for all eligible participants. Contributions are 100% immediately vested. To sponsor a SIMPLE, a business cannot have more than 100 eligible employees during the preceding calendar year. Certain notices must be provided annually to eligible employees.
Regardless of the type of plan, tax-deferred investing can help both employers and participants maximize retirement savings.
Please contact us for more information about employer-sponsored retirement plans.
Investors should carefully consider the investment objectives, risks, charges and expenses of the investments in retirement plan. This and other important information is contained in the prospectuses, which can be obtained from your financial professional and should be read carefully before investing.
