Give employees tools to develop an asset allocation model tailored to their individual goals across all aspects of their financial lives.
>>401(k) and SIMPLE 401(k) Plans
A 401(k) is a tax-qualified, defined contribution plan that contains a salary deferral arrangement. Each eligible employee may reduce his or her current compensation by a certain amount or percent and contribute this amount to the 401(k) plan on a pre-tax basis. The employer may also elect to make a matching contribution or profit sharing contribution to the plan.
Who can establish a 401(k)?
Any employer except a state or local government.
What are the contribution requirements?
Employee salary deferrals may not exceed the lesser of 25% of compensation (after reduction for deferrals) or $13,000 for 2004. Total contributions to the plan may not exceed the lesser of 25% total plan W-2 compensation up to $41,000 per participant (sole proprietors and partners must use Adjusted Net Business Income for contribution calculation). Matching and profit sharing contributions are made at the discretion of the employer.
Individuals age 50 and over may make annual "catch up" contributions in addition to their maximum salary deferral. For 2004, the catch-up amount is $3,000.
Certain individuals may be eligible to receive a tax credit for their 401(k) contributions. Depending on their Adjusted Gross Income (AGI), they may be eligible to receive a credit of up to 50% of their contribution (up to $1,000)
Excess contributions will incur a 10% penalty to the employer on the excess amount unless removed within 2 1/2 months after the close of the plan year.
Which employees are eligible to participate?
Employers must include employees who are at least 21 years of age and have completed at least one year of service.
What are the deadlines associated with a 401(k)?
The plan must be established on or before the last day of the employer's taxable year. Employee salary reduction contributions must be submitted as soon as it is administratively feasible, but no later than 15 days after end-of-month deferral. Employer contributions must be made by the due date of the employer's federal income tax return, including extensions.
What amount is tax-deductible to the employer?
The employer may deduct all contributions up to 25% of the compensation paid to all employees covered under the plan.
Under what circumstances can an employee take a distribution from the 401(k)?
Distributable events include:
>reaching age 59 1/2 (even if still working and plan allows)
>death
>permanent disability
>termination of employment (including retirement)
>financial hardship (if plan allows)
>plan termination
Distributions must begin by April 1 of the calendar year following the year in which the participant attains age 70 1/2 or by the year of retirement if later, and the second distribution must be taken by the end of that same year. Each subsequent annual distribution must be taken by December 31 of each year. Owners of 5% or more of the sponsoring business must begin distributions by April 1 of year following attainment of age 70 1/2.
Distributions may be taken in a lump sum, or via systematic withdrawals, or annuitized (taken in regular payments over time) and must be initiated by the plan trustee.
Are there any taxes or penalties on distributions?
Generally, distributions will be taxable as income to the recipient, although some participants may be able to reduce their tax liability through forward averaging.
Distributions taken before age 59 1/2 incur a 10% early withdrawal penalty on the taxable amount actually distributed prior to attainment of age 59 1/2, death, permanent disability or separation from service after attaining age 55. The penalty is not applicable to distributions received as substantially equal payments under Section 72(t).
An "excess accumulation" penalty tax of 50% will be applied to any amount that should have been distributed--based on minimum required distributions (MRDs)--but was not distributed.
What makes a 401(k) attractive?
>Employees take responsibility for funding and investment direction.
>Employer contributions are discretionary and not based on profits.
>Employer can tie the company contribution to an employee's level of participation through a "match".
>Employer may attract and retain better employees.
What is a SIMPLE 401(k)?
Limited to employers who have had 100 or fewer employees who earned $5,000 or more during the preceding year, the SIMPLE 401(k) offers simplified administration in exchange for required employer contributions. Employees are limited to $9,000 in salary deferrals(2004) and the employer must either match the deferral up to 3% or contribute 2% to every eligible employee's account. Like the SIMPLE IRA, contributions are 100% vested immediately.
>> 403(b) Plans
What is a 403(b) Plan?
A 403(b) plan is a salary deferral plan for non-profit organizations as categorized under Section 501(c)(3) of the Internal Revenue Code. A 403(b) combines many of the features of a 401(k) with the flexibility of an individual IRA.
Who can establish a 403(b)?
Public schools and non-profit organizations [IRS Code Section 501(c)(3)].
What are the contribution requirements?
Generally, salary deferrals may not exceed the lesser of $13,000 or 100% of net compensation (excluding the actual contribution), but other contribution calculation methods may be elected. Employer plus employee contributions may not exceed the lesser of 100% of net compensation or a maximum dollar amount of $41,000. Church employees may also be subject to special rules.
Individuals age 50 and over may make annual "catch up" contributions in addition to their maximum salary deferral. For 2004, the catch-up amount is $3,000.
Certain individuals may be eligible to receive a tax credit for their 403(b) contributions. Depending on their Adjusted Gross Income (AGI), they may be eligible to receive a credit of up to 50% of their contribution (up to $1,500)
Generally, the excess deferral contributions will incur a 10% penalty to the employee on the excess amount plus any earnings unless removed within 3 1/2 months after the close of the plan year. There is also a 6% penalty tax on excess contributions made by the employer, also payable by the employee. The excess employer contributions plus earnings must be removed from the account within 2 1/2 months after the close of the plan year to avoid the penalty.
Which employees are eligible to participate?
Employees with earned compensation from a qualifying employer. Minimum participation, coverage, and anti-discrimination requirements may apply.
What are the deadlines associated with a 403(b)?
The plan may be established and funded any time during the calendar year. Salary deferral contributions are based on the employee's taxable year and in order to be credited properly, should be contributed by the earlier of 30 days after reduction from salary or 30 days after the plan year-end.
What amount is tax-deductible to the employer?
Salary deferrals are deposited to the plan on a pre-tax basis to the employee.
Can an employee take a distribution from the 403(b)?
Only under certain conditions, which include:
- Termination of employment (including retirement)
- Reaching age 59 1/2
- Permanent disability of participant
- Death of participant
- Financial hardship
Distributions may be taken in partial amounts, in a lump sum, taken via systematic withdrawals, or annuitized. For salary reduction contributions, the owner of the account may request distributions; however, if requested for financial hardship, the employer must authorize. Employer contribution redemptions must be authorized by the employer via a written request.
What are the permitted investments of the 403(b) account?
Only taxable mutual funds and annuities.
Are there any taxes or penalties on distributions?
All distributions will be taxable as income to the recipient.
Premature distributions incur a 10% early withdrawal penalty on the taxable amount actually distributed prior to attainment of one of the distributable events listed above. The penalty is not applicable to Financial Hardship distributions if used to pay deductible medical expenses.
An "excess accumulation" penalty tax of 50% will be applied to any amount that should have been distributed based on minimum required distributions (MRDs), but which was not distributed.
Are rollovers and transfers permitted?
One may transfer 403(b) assets from one sponsoring firm to another sponsoring firm. Both annuities and mutual fun 403(b) assets may be rolled into an IRA.
What makes a 403(b) attractive?
- Employees take responsibility for funding and investment direction.
- Employer contributions are discretionary and not based on profits.
- Employer may attract and retain better employees
>> Money Purchase Pension Plans
** For plan years beginning after December 31, 2001, Money Purchase Pension plans will be less advantageous vs. Profit Sharing Plans than they have been. Potential plan sponsors may not want to establish a Money Purchase Pension Plan; the Profit Sharing Plan may be an equally beneficial option.**
What is a Money Purchase Pension Plan?
A Money Purchase Pension Plan is a qualified retirement plan established by an employer to allow for tax-deductible contributions of the lesser of 25% of total eligible compensation up to $41,000 per participant (sole proprietors and partners must use Adjusted Net Business Income for contribution calculation). The contribution percentage is established in the plan adoption agreement and is inflexible. The adoption agreement must be amended to change the contribution percentage. Like the Profit Sharing Plan, the Money Purchase Pension Plan can generally be implemented and administered without substantial set up charges and expensive annual administrative fees.
Why is a Money Purchase Pension Plan attractive to small businesses?
The major advantage to adopting a Money Purchase Pension Plan is the ability to contribute a greater percentage of compensation than is available in most other plans. This aspect is often attractive to the employer who may be attempting to maximize the dollars contributed on his or her own behalf. A Money Purchase Pension Plan will attract and help retain valuable employees, while also affording the flexibility to exclude some part-time workers (typically those who work fewer than 1,000 hours per year). All contributions are made by the employer.
The employee enjoys an employer funded benefit plan that offers the ability to accumulate more assets than through a Traditional IRA, and tax-deferred growth of investments while in the plan.
Who can establish a Money Purchase Pension Plan?
Corporations (S & C type), self-employed individuals, partnerships and non-profit organizations can establish a Money Purchase Pension Plan.
What are the eligibility requirements?
An employer may wish to restrict plan eligibility in order to reward those employees with longer tenure. This is permissible within certain limits. The plan may exclude employees who have not attained age 21 and those with less than two years of service (a year of service is generally defined as 1,000 hours within the plan year). It is more common to establish a one year service requirement which allows a vesting schedule to be applied to contributions, because employees restricted from participating in the plan for more than a year become 100% vested upon entry into the plan.
The plan may also exclude non-resident aliens and employees covered under a collective bargaining agreement, as well as entire subsidiaries, divisions, locations or classifications of employees as long as the plan covers at least 70% of all non-highly compensated employees.
What is the deadline for establishing a Money Purchase Pension Plan?
The plan must be established by the last day of the employer's fiscal year, although funding may be deferred until the employer's tax-filing deadline, including filed-for extensions.
What are the employer's responsibilities?
The employer is considered the "plan sponsor," and as such is responsible for overseeing the continuing compliance of the plan with current laws. In addition, records must be kept of each participant's share of ownership in plan assets, eligibility, vesting, and any outstanding loans. With the exception of employers who have no common-law employees other than a spouse and total plan assets of less than $100,000, all plans must file an annual 5500 report to the IRS. Most employers find that hiring an accountant or independent plan administrator is the most effective way to avoid any oversights of these responsibilities.
What contribution amount is tax-deductible to the employer?
The employer may deduct all contributions up to 25% of the compensation paid to each employee covered under the plan.
When can an employee take a distribution from the Money Purchase Pension Plan?
An employee must experience a "qualifying event" to gain access to their Money Purchase Pension Plan account assets. Distributions can only be made in the following circumstances:
> Termination of employment;
> Termination of the plan;
> Permanent disability of the participant;
> Death of the participant; or
> Normal or early retirement as defined in the plan document.
Are there any taxes or penalties on distributions?
All distributions will be taxable as income to the recipient, except for distributions attributable to after-tax contributions. Generally, distributions prior to age 59 1/2 are subject to a 10% penalty in addition to income taxes. Please consult your tax advisor for more complete information and additional penalties.
Are loans available from the plan?
Participants may take loans from the plan as long as the employer elects to allow loans in the plan adoption agreement. Owners of S Corporations, sole proprietors and partners are not permitted to take loans.
>> Profit Sharing Plan (Discretionary Contribution)
What is a Profit Sharing Plan?
A Profit Sharing Plan is a qualified retirement plan established by an employer to allow for discretionary tax-deductible contributions of up to 100% (25% is deductible to the employer) of total compensation paid to all eligible employees. Generally, a Profit Sharing Plan can be implemented and administered without substantial set up charges or excessive yearly administrative fees.
Why should a small business establish a Profit Sharing Plan?
There are significant advantages to adopting a Profit Sharing Plan for both the employer and the employees. The employer can attract and retain valuable employees, while retaining the flexibility to exclude some part-time workers (typically those who work fewer than 1,000 hours per year). All contributions are made by the employer, and the percentage contributed can vary from year to year.
The employee enjoys an employer funded benefit plan that offers the ability to accumulate more assets than possible through a Traditional IRA, and tax-deferred growth of investments while in the plan.
Who can establish a Profit Sharing Plan?
Corporations (S & C type), self-employed individuals, partnerships and non-profit organizations can establish a Profit Sharing Plan. The companies are not required to base contributions on "profits," nor are they required to have current profits.
What are the eligibility requirements?
An employer may wish to restrict plan eligibility in order to reward those employees with longer tenure. This is permissible within certain limits. The plan may exclude employees who have not attained age 21 and those with less than two years of service (a year of service is generally defined as 1,000 hours within the plan year). It is more common to establish a one year service requirement which allows a vesting schedule to be applied to contributions, because employees restricted from participating in the plan for more than a year become 100% vested upon entry into the plan.
The plan may also exclude non-resident aliens and employees covered under a collective bargaining agreement, as well as entire subsidiaries, divisions, locations or classifications of employees as long as the plan covers at least 70% of all non-highly compensated employees.
What is the deadline for establishing a Profit Sharing Plan?
The plan must be established by the last day of the employer's fiscal year, although funding may be deferred until the employer's tax-filing deadline, including filed-for extensions.
What are the employer's responsibilities?
The employer is considered the "plan sponsor," and as such is responsible for overseeing the continuing compliance of the plan with current laws. In addition, records must be kept of each participant's share of ownership in plan assets, eligibility, vesting, and any outstanding loans. With the exception of employers who have no common-law employees other than a spouse and total plan assets of less than $100,000, all plans must file an annual 5500 report to the IRS. Most employers find that hiring an accountant or independent plan administrator is the most effective way to avoid any oversights of these responsibilities.
How are contributions calculated?
A company may make contributions to a profit sharing plan as a percentage of compensation for each eligible employee. The maximum amount that may be contributed to the plan overall is 100% of total compensation paid to all eligible employees.
There are several Profit Sharing Plan variations which may allow for "permitted disparity" between contribution percentages of different employees. These variations are known as "Social Security Integration," "Age-Weighted" and "New Comparability" plans and tend to benefit higher compensated and/or older employees. The potential drawback to these options may be a significant escalation in the cost of adopting and operating them.
What contribution amount is tax-deductible to the employer?
The employer may deduct all contributions up to 25% of the compensation paid to each employee covered under the plan.
When can an employee take a distribution from the Profit Sharing Plan?
Employees must experience a "qualifying event" to gain access to their Profit Sharing Plan account assets. Distributions can only be made in the following circumstances:
> Termination of employment;
> Termination of the plan;
> Permanent disability of the participant;
> Death of the participant;
> Normal or early retirement as defined in the plan document;
> The attainment of age 59 1/2 if permitted n the plan document; or
> Financial hardship if permitted in the plan document.
Are there any taxes or penalties on distributions?
All distributions will be taxable as income to the recipient except for distributions attributable to after-tax contributions. Generally, distributions prior to age 59 1/2 are subject to a 10% penalty in addition to income taxes. Please consult your tax advisor for more complete information and additional penalties.
Employer-Sponsored Retirement Plans