The following questions and answers highlight some of the important parts of a qualified retirement plan. Please remember, these are only highlights and are being provided to you for general information purposes only. It is not plan specific and you may not rely on it as it pertains to your plan. Your Plan’s Document and Summary Plan Description describe the unique features of your Plan in much more detail.
Plan Sponsorship
- Why should an Employer consider sponsoring a retirement plan for their employees?
- What are some of the benefits of sponsoring a retirement plan?
Common Types of Plans
Common Areas of Concern for both the Plan Sponsor and the Employee
Common Terms
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Why should an Employer consider sponsoring a retirement plan for their 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.
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What are some of the benefits of sponsoring a retirement plan?
Employer Benefits:
- Employer contributions are tax deductions
- Plan assets grow tax free
- Flexible plan options available to meet your goals and needs overtime
- Employee retirement plans attract and retain better employees
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 reductions
- Compounding interest over time allows small regular contributions to grow to significant retirement savings
- Retirement assets can be carried from one employer to another
- Employee has an opportunity to improve financial security in retirement
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This is a qualified retirement plan which provides each plan participant with an individual account balance solely based upon the amounts contributed by the Employer and perhaps by the Employee, and any income, gains and losses, expenses plus any reallocated plan forfeitures from other plan participant accounts. Employer contributions are generally subject to the plan’s vesting schedule. Employee contributions are always 100% vested.
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This is a defined contribution plan in which an Employer can make discretionary contributions each year. These contributions are allocated to all eligible plan participants based on a predetermined formula set out in the Plan Document. Although the decision to make an Employer contribution to the plan is discretionary, they should be substantial and recurring. Contributions do not necessarily have to come out of company profits.
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This is a defined contribution plan which allows participants to contribute a portion of their compensation through a Salary Deferral Agreement. These contributions can either be made on a pre-tax or after tax basis based on the plan’s specific requirements. These contributions are always 100% vested. The Employer can elect to make discretionary Profit Sharing or Matching contributions as defined in the Plan’s document. These plans are generally subject to ADP and ACP testing unless a Safe Harbor provision is included in the plan design.
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This is a defined contribution plan in which the Employer has required funding each year based on a percentage of each participant’s compensation.
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This is a qualified retirement plan with definitely determinable benefits based on a specific formula. Benefits are generally based on compensation, age and years of service with the Employer. This plan has required funding each year which is based on the Employer’s demographics, plan formula, plan assets and actuarial assumptions.
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A distribution from a qualified retirement plan can only occur if there is a distributable event. These include one of the following:
- Termination of employment prior to attainment of the plan's early or normal retirement date
- Termination of employment after attainment of the plan's early or normal retirement date
- Total and Permanent Disability
- Death
The plan’s document will dictate the actual timing of a plan distribution after a distributable event has occurred. Generally, plan distributions may be rolled over or taken in a lump sum cash distribution. There are tax implications to taking a cash distribution. Participants taking a distribution from a qualified retirement plan should read the Special Tax Notice Regarding Plan Payments which is included with their distribution paperwork prior to making their election.
If the plan allows for distributions while still actively employed the participant must meet all the specific criteria as outlined in the plan’s document for taking an In Service distribution.
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Each plan document has specified eligibility criteria which must be satisfied prior to becoming a plan participant. Please check your Plan document or Summary Plan Description for your plan’s eligibility conditions before enrolling a participant into the plan.
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The date(s) upon which a employee will become a plan participant. Each plan document has specified entry dates for plan participation. An employee must first satisfy the specific plan’s eligibility conditions prior to entry. Please check your Plan document or Summary Plan Description for your plan’s entry dates.
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If allowed by the plan a plan participant may apply for a loan from their vested account balance. The IRS limits the maximum loan amount to the lesser of $50,000 or 50% of a plan participant’s vested account balance. Loans must be paid back to the plan with interest within five years from the date of the loan, unless the loan is for the purchase of a primary residence. Loan payments are generally made through payroll as after tax deductions. The Participant Loan Program may impose further restrictions on the reasons for a loan and the accounts available for a loan. Please check your Plan document, Summary Plan Description or Participant Loan Program for specific rules on the availability of loans in your plan
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If allowed by the plan a plan participant may apply for a hardship withdrawal from their vested account balance due to an immediate and heavy financial need, as defined by the IRS, and cannot be met by other means. These withdrawals have very strict circumstances under which a plan participant under which they will be granted to a plan participant by the Plan Trustee. Tax implications apply as well as a six month suspension of the participant’s salary deferrals under a 401(k) arrangement.
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This is a very technical situation and each employee’s circumstances will be different.
Generally, if an employee terminated after satisfying the plan’s eligibility and was considered a plan participant prior to termination then the participant may re-enter the plan immediately upon his date of rehire.
If an employee terminated prior to satisfying the plan’s eligibility requirements and/or prior to becoming a plan participant please contact your assigned Pension Administrator for further clarification.
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