Qualified Retirement Plan Design & Administration
We service any strategy, any company size, and any qualified retirement style, including:
More and more employees view 401(k) plans as a valuable benefit which has made them the most popular type of retirement plan today. Employees can benefit from a 401(k) plan even if the employer makes no contribution. Employees can voluntarily elect to make pre-tax contributions through payroll deductions up to an annual maximum limit ($19,000 in 2019). The plan may also permit employees age 50 and older to make additional "catch-up" contributions, up to an annual maximum limit ($6,000 in 2019). Employee contributions are 100% vested at all times.
The plan may also permit employees to make after-tax Roth contributions through payroll deductions instead of pre-tax contributions. Roth contributions allow an employee to receive a tax-free distribution of the contributions and of the earnings on the employee's Roth contributions if the distribution meets certain requirements.
The employer will often match some portion of the amount deferred by the employee in order to encourage greater employee participation (e.g., 25% match on the first 4% deferred by the employee). Since a 401(k) plan is a type of profit sharing plan, profit sharing contributions may be made in addition to, or instead of, matching contributions. Many employers offer employees the opportunity to take hardship withdrawals or to borrow from the plan.
Employee and employer matching contributions are subject to special nondiscrimination tests which limit how much the group of employees referred to as "Highly Compensated Employees" can defer based on the amounts deferred by the "Non-Highly Compensated Employees." In general, employees who fall into the following two categories are considered to be Highly Compensated Employees:
The plan may be designed to satisfy "401(k) Safe Harbor" requirements which can eliminate nondiscrimination testing. The Safe Harbor requirements include certain minimum employer contributions and 100% vesting of employer contributions that are used to satisfy the Safe Harbor requirements. The benefit of eliminating the testing is that Highly Compensated Employees can defer up to the annual limit ($19,000 in 2019) without concern for how much the Non-Highly Compensated Employees defer.
A qualified plan must meet a certain set of requirements set forth in the Internal Revenue Code such as minimum coverage, participation, vesting and funding requirements. In return, the IRS provides tax advantages to encourage businesses to establish retirement plans including:
Qualified plan assets are protected from creditors of the employer and employee. Employers can choose between two basic types of retirement plans: defined contribution and defined benefit. Both a defined contribution and a defined benefit plan may be sponsored to maximize benefits. Our consultants can help you choose the right plan for your company. Listed below is a description of the types of plans that are available.
New comparability plans, sometimes referred to as "cross-tested plans," are usually profit sharing plans that are tested for nondiscrimination as though they were defined benefit plans. By doing so, certain employees may receive much higher allocations than would be permitted by standard nondiscrimination testing. New comparability plans are generally utilized by small businesses that want to maximize contributions for owners and higher paid employees, while minimizing contributions for all other eligible employees.
Employees are divided into groups based on valid business classifications, e.g., owners and non-owners. Each group may receive a different contribution percentage. For example, a higher contribution percentage may be given for the owner group than for the non-owner group, as long as the plan satisfies the nondiscrimination requirements.
Government agencies are no longer allowed to establish 401(k) plans; therefore, to get the same features as a private sector group, two separate plans must be established. The 457(b) plan holds the voluntary employee contributions and can be set up to allow both Pre-Tax and Roth Contributions. The 401(a) is established to hold all Employer Contributions. The two plans can then be coordinated to be able to provide the similar style plans to which private sector employees have come accustom.
A cash balance plan is a type of defined benefit plan that resembles a defined contribution plan. For this reason, these plans are referred to as hybrid plans. A traditional defined benefit plan promises a fixed monthly benefit at retirement that is usually based upon a formula that takes into account the employee's compensation and years of service. A cash balance plan looks like a defined contribution plan because the employee's benefit is expressed as a hypothetical account balance instead of a monthly benefit.
Each employee's "account" receives an annual contribution credit, which is usually a percentage of compensation, and an interest credit based on a guaranteed fixed rate or some recognized index like the 30 year U.S. Treasury bond rate which could vary. This interest credit rate must be specified in the plan document. At retirement, the employee's benefit is equal to the hypothetical account balance which represents the sum of all contributions and interest credits. Although the plan is required to offer the employee the option of using the account balance to purchase an annuity benefit, most employees will take the cash balance and roll it over into an individual retirement account (unlike in many traditional defined benefit plans which do not offer lump sum payments at retirement).
As in a traditional defined benefit plan, the employer bears the investment risks and rewards in a cash balance plan. An actuary determines the contribution to be made to the plan, which is the sum of the contribution credits for all employees plus the amortization of the difference between the guaranteed interest credits and the actual investment earnings (or losses).
Employees appreciate this design because they can see their "accounts" grow, but they are still protected against fluctuations in the market. In addition, a cash balance plan is more portable than a traditional defined benefit plan since most plans permit employees to take their cash balance and roll it into an individual retirement account when they terminate employment or retire.