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We are committed to providing top-tier employer services focused on your company goals, while educating and empowering employees to confidently save for their retirement future.
66% of workers say they are more likely to stay with their employer if they offer a financial wellness program*
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*John Hancock. "Stress, Finances, and Well-being" 2022.
This information was developed as a general guide to educate plan sponsors, but is not intended as authoritative guidance or tax or legal advice. Each plan has unique requirements, and you should consult your attorney or tax advisor for guidance on your specific situation. In no way does advisor assure that, by using the information provided, plan sponsor will be in compliance with ERISA regulations.
A 401(k) is a feature of a qualified profit-sharing plan that allows employees to contribute a portion of their wages to individual accounts.
Elective salary deferrals are excluded from the employee’s taxable income (except for designated Roth deferrals). Employers can contribute to employees’ accounts.
Distributions, including earnings, are includible in taxable income at retirement (except for qualified distributions of designated Roth accounts).
A subset of the 401(k) plan is the SIMPLE 401(k) plan. Just like the SIMPLE IRA plan, this is a plan just for you: the small business owner with 100 or fewer employees. However, just as with the SIMPLE IRA plan, there is a two-year grace period if you exceed 100 employees, to allow for growing businesses.
Under a SIMPLE 401(k) plan, an employee can elect to defer some compensation. But unlike a regular 401(k) plan, you the employer must make either:
A matching contribution up to 3% of each employee’s pay, orA non-elective contribution of 2% of each eligible employee’s pay.No other contributions can be made. The employees are totally vested in any and all contributions
A SEP plan allows employers to contribute to traditional IRAs (SEP-IRAs) set up for employees. A business of any size, even self-employed, can establish a SEP.
A profit-sharing plan accepts discretionary employer contributions. There is no set amount that the law requires you to contribute. If you can afford to make some amount of contributions to the plan for a particular year, you can do so. Other years, you do not need to make contributions. Also, your business does not need profits to make contributions to a profit-sharing plan.
If you do make contributions, you will need to have a set formula for determining how the contributions are divided. This money goes into a separate account for each employee.
One common method for determining each participant’s allocation in a profit-sharing plan is the “comp-to-comp” method. Under this method, the employer calculates the sum of all of its employees’ compensation (the total “comp”). To determine each employee’s allocation of the employer’s contribution, you divide the employee’s compensation (employee “comp”) by the total comp. You then multiply each employee’s fraction by the amount of the employer contribution. Using this method will get you each employee’s share of the employer contribution.
Defined benefit plans provide a fixed, pre-established benefit for employees at retirement. Employees often value the fixed benefit provided by this type of plan. On the employer side, businesses can generally contribute (and therefore deduct) more each year than in defined contribution plans. However, defined benefit plans are often more complex and, thus, more costly to establish and maintain than other types of plans.
Money purchase plans have required contributions. The employer is required to make a contribution to the plan each year for the plan participants.
With a money purchase plan, the plan states the contribution percentage that is required. For example, let’s say that your money purchase plan has a contribution of 5% of each eligible employee’s pay. You, as the employer, need to make a contribution of 5% of each eligible employee’s pay to their separate account. A participant’s benefit is based on the amount of contributions to their account and the gains or losses associated with the account at the time of retirement.
That type of arrangement is different than a profit-sharing plan. With the profit-sharing plan, you, the employer, can decide that you’ll contribute a certain amount, say $10,000. Then, depending on the plan’s contribution formula, you allocate that $10,000 to the separate accounts of the eligible employees. Also, in past years, money purchase plans had higher deductible limits than profit-sharing plans. This is no longer the case.
An employee stock ownership plan (ESOP) is an IRC section 401(a) qualified defined contribution plan that is a stock bonus plan or a stock bonus/money purchase plan. An ESOP must be designed to invest primarily in qualifying employer securities as defined by IRC section 4975(e)(8) and meet certain requirements of the Code and regulations. The IRS and Department of Labor share jurisdiction over some ESOP features.
Under Internal Revenue Code (IRC) Section 414(d), a governmental plan is an IRC Section 401(a) retirement plan established and maintained for the employees of:
the United States or its agency or instrumentality,a state or political subdivision, or its agency or instrumentality, oran Indian tribal government or its subdivision, or its agency or instrumentality (participants must substantially perform services essential to governmental functions rather than commercial activities).Other types of governmental plans include:
403(b) tax-sheltered annuity plans,457 deferred compensation plans,Certain grandfathered 401(k) plans adopted by a governmental entity before May 6, 1986.
Plans of deferred compensation described in IRC section 457 are available for certain state and local governments and non-governmental entities tax exempt under IRC Section 501. They can be either eligible plans under IRC 457(b) or ineligible plans under IRC 457(f). Plans eligible under 457(b) allow employees of sponsoring organizations to defer income taxation on retirement savings into future years. Ineligible plans may trigger different tax treatment under IRC 457(f).
A multiple employer plan is a plan maintained by two or more employers who are not related.