|
We Keep our Promises Compensation Systems, Inc. is a market leader in designing, administering, and communicating business retirement plans. We are dedicated to providing strategies for long term financial security for our clients and their employees. We promise to provide personal service, make your job easier and deliver results...More |
|
| Keep Informed! Keep informed about changes in retirement plan laws and current issues. Click here to sign up to receive our quarterly newsletter today! |
|
|
| Types of Plans |
|
The 401(k) Plans are a commonly used retirement plan by employers, and are very flexible programs. There are no limitations on the number of employees that may be included in a traditional 401(k) plan. The traditional 401(k) plan has three types of contributions:
All contributions are tax deductible and tax deferred. The employee contributions are limited to 100% of income. Click here for details. The employer matching contribution is flexible. The match may be fixed or discretionary. An example of a typical match is a 50% match on the deferral up to the first 6% of an employee's compensation. The matching contributions may be modified or stopped in the traditional 401(k) plans. The matching is only contributed for participants who elect to defer to the 401(k) plan. The last type of employer contribution is the discretionary or profit sharing contribution. All eligible employees, regardless of employee deferral, receive a profit sharing contribution. The profit sharing contribution is very flexible and may be changed each year or never used. The maximum employer contribution to the 401(k) plan is 25% of compensation of eligible employees. Other benefits to the 401(k) are:
The 401(k) plans require administration and reporting. A legal document, testing requirements, and annual federal filing forms are some of the administrative functions on the plan. The plan is also required to maintain a fidelity bond in the amount of 10% of the plan's assets. The Safe Harbor 401(k) plan is a variation of the traditional 401(k) plans that allows plan sponsors to automatically pass the discrimination testing (ADP/ACP test and top heavy tests). Safe Harbor plans are appropriate for situations in which the highly compensated employees (HCE's) are limited in their contributions to the plan due to low participation of the non-highly compensated employees (NHCE). If the plan meets the requirements of Safe Harbor, the HCE's may contribute up to 100% of their income or the maximum limits. In order to comply with the Safe Harbor regulations, the employer must make mandatory contributions to the plan. These mandatory contributions are 100% vested immediately. The employer must notify the participants of the safe harbor contributions 60 days prior to the plan year. The Safe Harbor must be restated to the participants each year. One of the following elections must be made, and the elections may change from year to year:
OR
The other provisions of the Safe Harbor 401(k) plans are the same as traditional 401(k) plans. A Single 401(k) plan has many of the same benefits of the traditional 401(k) plan. However, the Single 401(k) is designed for one owner and a spouse, if applicable. The Single 401(k) has reduced administration and cost, and does not require a 5500 form until assets exceed $250,000. The Single 401(k) allows deferrals up to the maximum 401(k) deferral. Click here for details. Plus, the Single 401(k) allows an additional employer contribution of 25% of compensation. The Single 401(k) is ideal, for a sole owner who wants to maximize the tax deductions in his/her retirement plan. The 403(b) Plan is available to employees of educational institutions and certain non-profit organizations. Contributions to 403(b) plans are tax deductible and tax deferred. The 403(b) plans work similarly to 401(k) in that the contributions limits are the same. Click here for details. The 403(b) plans can have matching and discretionary employer contributions along with the employee deferral. SIMPLE IRA plans are designed for employers with under 100 employees. The plan is designed to be administratively easy and uncumbersome. The plan allows for employee deferrals and requires an employer contribution. Click here for limit details. The employer is required to make contributions to the SIMPLE IRA. The employer must state the formula to the participants each year. All employer contributions are 100% vested immediately. One of the following formulas must be elected:
OR
The SIMPLE IRA plan may require up to a two (2) year waiting period. A year of service is defined as someone who earns more than $5,000 in a calendar year. The SIMPLE IRA's main advantages are:
A payroll deduction IRA may be an ideal plan for companies looking to offer a retirement benefit, but are concerned about employer costs and administrative burdens. Both traditional IRAs and ROTH IRAs may be offered through payroll deduction. Click here for limit details. The Profit Sharing Plan is solely funded by employer contributions. The employer makes all contributions to the plan on a discretionary basis and can vary the contributions year to year. The maximum contribution is 25% of eligible payroll. Any size or type of business may establish a Profit Sharing Plan. The plan may include a waiting period up to a maximum of one year and 1000 hours of service required with a vesting schedule. If an employee terminates prior to becoming fully vested, the non-vested monies are forfeited. The forfeitures can be used to reallocate monies to the current participants. Profit Sharing Plan contributions may be allocated by using a number of different formulas:
Profit Sharing plans allow for loans and hardship withdrawals if permitted by the employer. Administrative reporting, legal documents, and federal filing are required on the plan. Age Weighted Profit Sharing Plans Age Weighted Profit Sharing Plans are profit sharing plans which allocate the contribution based upon age and income. This plan has the same features of flexibility of contributions and vesting as the profit sharing plans. The age weighted allocation is ideal for older workers. The allocation takes in consideration the time the employee has prior to normal retirement age and calculates the benefit needed to fund retirement. Therefore, younger workers have more time to accumulate monies and receive a smaller contribution. Older workers receive a larger contribution due to the shorter time prior to retirement. New Comparability Profit Sharing Plan Some Profit Sharing and 401(k) clients might benefit from using an allocation formula that takes advantage of cross-testing or what is also know as new comparability. First, under this allocation formula, a sponsor can create a separate class for each employee, allowing for significant flexibility and control in determining how much is given to each participant's account. However, the plan must then be tested to demonstrate that the allocation does not discriminate in favor of those who are highly compensated employees, namely owners and their family, and those who made more than $90,000 in the previous year. For this testing method to be successful, an employer will need a number of employees who are significantly younger than the highly compensated employees. It is not necessary that all the employees are younger, but just a sufficient number to see that discrimination testing is passed. Age becomes a factor, as the older employees have a shorter time horizon until retirement, and this fact can be taken into account in allocating the employer contribution. Money Purchase Plans are less likely to be plans for consideration. With the passage of the 2002 EGTRRA provisions, profit sharing plans have become a more attractive and flexible program than money purchase plans. Unlike a profit sharing plan where employer contributions are optional, the Money Purchase Plan has a mandatory and fixed employer contribution. Typically the plans outline a fixed percentage contribution of the employee's compensation to be contributed by the employer each year. Many employers in 2002 discontinued their Money Purchase Plans in favor of the Profit Sharing Plans in order to gain flexibility. There are a few situations in which Money Purchase plans have been maintained. Those situations may include the need for the employer to have a guaranteed contribution to the employees. The other plan provisions of the Money Purchase are similar to the profit sharing plans. The plans allow for loans and have administrative requirements.
The SEP Plan is an employer contributory plan. The employer may contribute up to 25% of eligible payroll. The contributions are flexible and may change each year. All contributions are 100% vested immediately to the participants. SEP Plans require limited administrative functions and have no 5500 filing requirement. They are very inexpensive to administer. Many self employed individuals find the SEP to be an ideal plan design. The Simplified Employee Pension Plan may require up to a three (3) year waiting period. The Defined Benefit Plan defines and promises a specific benefit at some future date of retirement. Unlike a defined contribution plans (401(k)'s and Profit Sharing Plans, for example), which define the amount deposited and can be discretionary, but do not guarantee a future benefit, the Defined Benefit specifies a future benefit. For example, a benefit may be a monthly income starting at age 65 equal to 50% of the employee's average salary over the last three years. The employer is required to contribute, and may deduct, whatever amount is actuarially necessary to assure the benefit is funded. This places the investment risk on the employer, not the participant. If the investments perform differently than expected, the employer may have to contribute more to the Defined Benefit Plan. This plan works especially well for older workers. The benefit tends to reward long service and because older employees have less time to save, contributions for older workers are much higher. For older owners and managers who have had little chance to save for retirement, a defined benefit plan is an excellent way to make up for lost time.
In instances where an employer wants to provide supplementary compensation for key executives or employees and wishes to defer payment into the future, a non-qualified deferred compensation plan may be an option to consider. This plan allows an employer to "pick and choose" which employees are eligible. Assume for example, that an employer wants to induce a particularly valuable employee to remain with his company for a specific number of years. That employee could be motivated to do so on the promise from the company to pay him or her additional compensation upon the completion of a specific number of years of service with the company. This concept is called "golden handcuffs". In another case, the principals of a company or a partnership may want to defer compensation for themselves or for themselves and their partners, to avoid paying taxes on that compensation this year. That employer principal cannot achieve these goals through a conventional retirement plan because the laws require them to provide benefits that are uniform and that don't discriminate in favor of key executives. Accordingly, the best arrangement for them to accomplish their goals may be through a nonqualified plan. A "nonqualified," plan is simply a plan that is not subject to certain federal pension law provisions, such as nondiscrimination, eligibility, funding, and vesting. The trade off for not having to meet these special provisions in the laws is that a "nonqualified" plan does not get as many tax breaks as regular pension plans do. The main downside under a "nonqualified" plan is that an employer's business income tax deduction is also deferred; the business is not entitled to a deduction for the deferred compensation until the funds are available to the recipient, which could be years away. The following are a few of the uniquely variegated terms that describe some of the nonqualified plans available [SERPS]:
ALSO, PLEASE NOTE: Notwithstanding the
informational descriptions outlined above, due to the complexity
of these plans, it is imperative that employers discuss these
employee benefit options with their attorney or accountant
to determine whether a nonqualified plan is appropriate in
meeting the company's needs. |