Why should I set up a retirement plan…
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.
• 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 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 types of employer sponsored retirement plans are there…
• 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 for 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 Plan Administrator (TPA) 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 that amount into a 401(k) plan sponsored by their employer. These deferrals are accounted for 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 a Roth (after-tax) basis. Many 401(k) plans provide for employer matching or other employer contributions. The Federal Government and most state governments do not tax employer contributions and pre-tax 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 Plan Administrator (TPA) 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
Cash balance plans are 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.
What is a Qualified Retirement Plan...
A Qualified Retirement Plan is a retirement plan that satisfies §401(a) of the Internal Revenue Code. It must have a written plan document that contains language sufficient to facilitate compliance with the current tax code. Qualified Retirement Plans are required to file annual reports with the IRS demonstrating its compliance with §401(a). The most common retirement plans are those listed previously.
Other types of retirement plans that are not considered to be Qualified Retirement Plans exist and are not offered by Savvy Retirement Plans, However, we have listed them here for informational purposes.
• Payroll Deduction IRAs
Even if an employer does not 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. They also can be established using a two-page form. The employer 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 2018 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 some 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…
In order to establish a Qualified Retirement Plan, an employer must execute a legal document adopting a Qualified Retirement Plan. This document will govern all benefits offered by the Plan and certifies its intent to comply with the current tax code. All plan terms must be communicated to the employees using a Summary Plan Description (SPD). In addition, the employer must create a separate, legal Trust to hold all plan assets. In order for the employer to be able to deduct any contributions made to the plan, the above items must be completed prior to the end of the employer's 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 Compliance 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 associated with these accounts?
• How will the funds be invested? What are the fees associated with the investments?
• What information must the employer give the Third Party Administrative Compliance Firm?
• What fees will the employer be charged?
What is an Actuary...
In general, an Actuary’s services are only needed for defined benefit and cash balances plans. 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.
What is an Enrolled Actuary...
Enrolled Actuaries are a specific type of Actuary who has satisfied both the standards and qualifications of the Joint Board for the Enrollment of Actuaries and has 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:
• 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.