Why should I set up a retirement plan, and what are some of the benefits?

A retirement plan has lots of benefits for you, your business and your employees. Retirement plans allow you to invest now for financial security when you and your employees retire. As a bonus, you and your employees get significant tax advantages and other incentives.
Business benefits
• Employer contributions are tax-deductible.
• Assets in the plan grow tax-deferred.
• Flexible plan options are available.
• Tax credits and other incentives for starting a plan may reduce costs.
• A retirement plan can attract and retain better employees, reducing new employee training costs.
Employee benefits
• Employee contributions can reduce current taxable income.
• Contributions and investment gains are not taxed until distributed.
• Contributions are easy to make through payroll deductions.
• Compounding interest over time allows small regular contributions to grow to significant retirement savings.
• Retirement assets can be carried from one employer to another.
• Saver’s Credit is available.
• Employee has an opportunity to improve financial security in retirement

What different type of employer sponsored retirement plans are allowable?

  • Profit Sharing Plans
    Employer contributions to a profit sharing plan can be discretionary. Depending on the plan terms, there is often no set amount that an employer needs to contribute each year.
    If you do make contributions, you will need to have a set formula for determining how the contributions are allocated among plan participants. The funds are accounted separately for each employee. A Qualified Retirement Plan document and Annual Reporting to the IRS are required for a Profit Sharing Plan. Profit sharing plans can vary greatly in their complexity. Most Employers hire a Third Party Administrator for their profit sharing plans to help reduce the administrative burden on individual employers.
  • 401(k) Plans
    With a 401(k) plan, employees can choose to defer a portion of their salary. So instead of receiving that amount in their paycheck today, the employees can contribute the amount into a 401(k) plan sponsored by their employer. These deferrals are accounted separately for each employee. Deferrals are made on a pre-tax basis but, if the plan allows, the employee can choose to make them on an after-tax (Roth) basis. Many 401(k) plans provide for employer matching or other contributions. The Federal Government and most state governments do not tax employer contributions and pretax deferrals (plus earnings) until distributed.
    Like profit sharing plans, A Qualified Retirement Plan document and Annual Reporting to the IRS are required for a 401(k) Plans. Most Employers hire a Third Party Administrator for their 401(k) Plans to help reduce the administrative burden
    • Defined Benefit Plans
    Some employers find that defined benefit plans offer business advantages. For instance, businesses can generally contribute (and therefore deduct) more each year than in defined contribution plans. In addition, employees often value the fixed benefit provided by this type of plan and can often receive a greater benefit at retirement than under any other type of retirement plan. However, defined benefit plans are often more complex and, likely, more expensive to establish and maintain than other types of plans.
  • Cash Balance Plans
    A type of Defined Benefit Plan, but one where plan participants see their fixed benefit as an account balance. Businesses can generally contribute (and therefore deduct) more each year than in defined contribution plans. Like other Defined Benefit Plans, Cash Balance Plans are more complex and likely more expensive to establish and maintain than Defined Contribution type plans.
  • A Qualified Retirement Plan is a Retirement plan that satisfies §401(a) of the Internal Revenue Code
    • A Qualified Retirement Plan must have a Plan Document that contains language sufficient to document compliance with Code §401(a)
    • A Qualified Retirement Plan must file annual reports to the IRS demonstrating compliance with Code §401(a)
    • The most common types of Qualified Retirement Plans are Profit Sharing Plans, 401(k) Plans, and Defined Benefit Plans including Cash Balance Defined Benefit Plans.

Other types of retirement plans which do not meet this definition of a Qualified Retirement Plan are not offered by Savvy Retirement Plans, but are described below for informational purposes

  • Payroll Deduction IRAs
    Even if an employer doesn’t want to adopt a retirement plan, the employer can allow its employees to contribute to an IRA through payroll deductions, providing a simple and direct way for employees to save. In this type of arrangement, the employee always makes the decisions about whether, when, and how much to contribute to the IRA (up to $5,500 for 2018, and $6,500 if age 50 or older, increasing thereafter).
    Payroll deduction contributions are tax-deductible by the employee, to the same extent as other IRA contributions.
    Simplified Employee Pensions (SEPs)
    A SEP plan allows employers to set up SEP IRAs for themselves and each of their employees. Employers generally must contribute a uniform percentage of pay for each employee, although they do not have to make contributions every year. Employer contributions are limited to the lesser of 25 percent of pay or $55,000 for 2018. (Note: the dollar amount is indexed for inflation and may increase.) Most employers, including those who are self-employed, can establish a SEP.
    SEPs have low start-up and operating costs and can be established using a two-page form. And you can decide how much to put into a SEP each year – offering you some flexibility when business conditions vary.
    SIMPLE IRA Plans
    A SIMPLE IRA plan is a savings option for employers with 100 or fewer employees.
    This plan allows employees to contribute a percentage of their salary each paycheck and requires employer contributions. Under SIMPLE IRA plans, employees can set aside up to $12,500 in 2018 ($15,500 in 2015 if age 50 or older) by payroll deduction (subject to cost-of-living adjustment in later years). Employers must either match employee contributions dollar-for-dollar – up to 3 percent of an employee’s compensation – or make a fixed contribution of 2 percent of compensation for all eligible employees, even if the employees choose not to contribute.

SIMPLE IRA plans are easy to set up. You fill out a short form to establish a plan and ensure that SIMPLE IRAs (to hold contributions made under the SIMPLE IRA plan) are established for each employee. A financial institution can do much of the paperwork. Additionally, administrative costs are low.
You may have your employees set up their own SIMPLE IRAs at a financial institution of their choice or have all SIMPLE IRAs maintained at one financial institution you choose.

How do I establish a Qualified Retirement Plan?

The Employer must execute a legal document adopting a Qualified Retirement Plan

  • The Employer must create a legal Plan Document that governs all benefits offered by the Plan and certifies its intent to comply with the current tax code.
  • The Employer must communicate to employees these terms by providing them a Summary Plan Description (SPD)
  • The Employer must create a separate, legal Trust to hold all plan assets
  • All these activities must be completed by the end of the Employer’s tax year for the contributions to be deductible for that tax year
  • In most cases, an Employer will require the services of a Third Party Administrative Compliance Firm to establish and maintain its Qualified Retirement Plan

What is a Third Party Administrative Firm?

Most Employers hire a Third Party Administrative Compliance Firm to outsource a portion of their administrative responsibilities and to assist in making sure their Qualified Retirement Plan complies with the current tax code.

When hiring a Third Party Administrative Compliance Firm, the Employer should ask for a Service Agreement that outlines all plan responsibilities including the following:

  • Who is responsible for updating the plan document for any law changes?
    • Who will administer the plan?
    • Who gives any required plan notices to the participants?
    • Who files required forms and returns with the IRS or the Department of Labor?
    • Who determines whether any nondiscrimination testing will be required?
    • Who conducts any required nondiscrimination testing, and when will the testing be done?
    • Where will the plan accounts be maintained? What are the fees for those accounts?
    • How will the funds be invested? What are the fees associated with the investments?
    • What information must The Employer give the Third Party Administrator and when must it be provided?
  • What fees will you be charged?

What Coordination with my payroll service is required?

Make sure your payroll processor has a copy of your plan and any amendments, understands and correctly implements them. For example, make sure your payroll processor:
• uses the definition of compensation specified in your plan for contribution purposes and maximum limitations;
• timely deducts the correct amount of employee contributions;
• deducts the correct amount of any loan repayments.
Be sure to timely notify your payroll processor of any newly eligible employees who have enrolled in the plan as well as any required elective deferral suspensions for employees who have taken hardship withdrawals.

SIMPLE IRA plans are easy to set up. You fill out a short form to establish a plan and ensure that SIMPLE IRAs (to hold contributions made under the SIMPLE IRA plan) are established for each employee. A financial institution can do much of the paperwork. Additionally, administrative costs are low.
You may have your employees set up their own SIMPLE IRAs at a financial institution of their choice or have all SIMPLE IRAs maintained at one financial institution you choose.
• Profit Sharing Plans
Employer contributions to a profit sharing plan can be discretionary. Depending on the plan terms, there is often no set amount that an employer needs to contribute each year.
If you do make contributions, you will need to have a set formula for determining how the contributions are allocated among plan participants. The funds are accounted separately for each employee. A Qualified Retirement Plan document and Annual Reporting to the IRS are required for a Profit Sharing Plan. Profit sharing plans can vary greatly in their complexity. Most Employers hire a Third Party Administrator for their profit sharing plans to help reduce the administrative burden on individual employers.

• 401(k) Plans
With a 401(k) plan, employees can choose to defer a portion of their salary. So instead of receiving that amount in their paycheck today, the employees can contribute the amount into a 401(k) plan sponsored by their employer. These deferrals are accounted separately for each employee. Deferrals are made on a pretax basis but, if the plan allows, the employee can choose to make them on an after-tax (Roth) basis. Many 401(k) plans provide for employer matching or other contributions. The Federal Government and most state governments do not tax employer contributions and pretax deferrals (plus earnings) until distributed.
Like profit sharing plans, A Qualified Retirement Plan document and Annual Reporting to the IRS are required for a 401(k) Plans. Most Employers hire a Third Party Administrator for their 401(k) Plans to help reduce the administrative burden
• Automatic Enrollment 401(k) Plans
Automatic enrollment 401(k) plans can increase plan participation among rank-and-file employees and make it more likely that the plan will pass the tests ordinarily required under a traditional 401(k) plan. Some automatic enrollment 401(k) plans are exempt from the testing. This type of plan is for employers who want a high level of participation, and who have highly compensated employees whose contributions might be limited under a traditional 401(k) plan.
• Defined Benefit Plans
Some employers find that defined benefit plans offer business advantages. For instance, businesses can generally contribute (and therefore deduct) more each year than in defined contribution plans. In addition, employees often value the fixed benefit provided by this type of plan and can often receive a greater benefit at retirement than under any other type of retirement plan. However, defined benefit plans are often more complex and, likely, more expensive to establish and maintain than other types of plans.

What is a Qualified Retirement Plan?

• A Qualified Retirement Plan is a Retirement plan that satisfies §401(a) of the Internal Revenue Code
• A Qualified Retirement Plan must have a Plan Document that contains language sufficient to document compliance with Code §401(a)
• A Qualified Retirement Plan must file annual reports to the IRS demonstrating compliance with Code §401(a)

What is an Actuary? - A Brief Overview

In general, actuaries assess the financial consequences of risks and use mathematics, statistics and financial theory to analyze and determine the financial impact of uncertain future events.
Pension actuaries suggest methods to eliminate or reduce damage to parties if a future event occurs. They are primarily concerned with the payment of benefits, including death benefits, from a pension plan. Pension actuaries also calculate the required amount of an employer’s annual contribution to a defined benefit plan to ensure that current and future plan benefits are available to the participants.
Enrolled Actuaries
Many pension actuaries are Enrolled Actuaries – individuals who have satisfied the standards and qualifications of the Joint Board for the Enrollment of Actuaries and have been approved by the Board to perform actuarial services required under ERISA. These individuals have fulfilled knowledge and experience requirements related to pension laws and regulations, including:
• ERISA;
• the Internal Revenue Code;
• Treasury Regulations;
• IRS Revenue Rulings and IRS Notices;
• PBCG Premium Payment Instructions, Regulations and Technical Updates; and
• Department of Labor Regulations and Bulletins.