Chapter 19 Employee Benefit & Retirement Planning Savings/Match Plan Copyright 2011, The National Underwriter Company1 What is it? a qualified defined contribution plan –similar to a profit sharing plan –provides for and encourages after-tax employee contributions to plan –can have employer matching contributions –often part of profit share or 401(k) plan –may be replaced by Roth IRA

Chapter 19 Employee Benefit & Retirement Planning Savings/Match Plan Copyright 2011, The National Underwriter Company2 When is it indicated? 1.as add on to Sec. 401(k) to allow employees to increase contributions beyond annual limit on salary reductions for Sec. 401(k) 2.employees are –young –willing to assume investment risk –varied in need or desire for retirement savings

Chapter 19 Employee Benefit & Retirement Planning Savings/Match Plan Copyright 2011, The National Underwriter Company3 When is it indicated? 3.employer wants to supplement company defined benefit plan with plan that uses individual accounts and allows employees to save tax-deferred

Chapter 19 Employee Benefit & Retirement Planning Savings/Match Plan Copyright 2011, The National Underwriter Company4 Advantages 1.tax deferred savings for employees 2.employees choose amount to contribute 3.lump-sum distributions may be eligible for special 10 year averaging 4.individual participant accounts - participants benefit from profitable plan investments

Chapter 19 Employee Benefit & Retirement Planning Savings/Match Plan Copyright 2011, The National Underwriter Company5 Disadvantages 1.inadequate retirement savings 2.employees bear investment risk 3.administrative costs higher than alternatives (e.g. money purchase plan or profit sharing plan) 4.limit on annual additions may be too low for highly compensated

Chapter 19 Employee Benefit & Retirement Planning Savings/Match Plan Copyright 2011, The National Underwriter Company6 Design Features voluntary participation after tax employee contributions w/ employer match vesting requirements of employer match same as top-heavy plans  3 year cliff or 2-6 gradual vesting plan must meet nondiscrimination requirements generous provision for employee fund withdrawal or loans

Chapter 19 Employee Benefit & Retirement Planning Savings/Match Plan Copyright 2011, The National Underwriter Company7 Design Features plan can allow participant-investment direction; if regulations satisfied, plan trustee and employer relieved of fiduciary liability employers can offer plans that combine features of -regular profit sharing plan -savings plan -Section 401(k) salary reductions

Chapter 19 Employee Benefit & Retirement Planning Savings/Match Plan Copyright 2011, The National Underwriter Company8 Tax Implications 1.employer contributions deductible when made 2.employee contributions -NOT tax deductible -tax deferred until distributed 3.to be deemed nondiscriminatory, must meet actual contribution percentage test (ACP) 4.can meet ACP test in alternative ways

Chapter 19 Employee Benefit & Retirement Planning Savings/Match Plan Copyright 2011, The National Underwriter Company9 Tax Implications for employee contributions a)for HCEs, average ratio of employee contributions + employer matching contributions to compensation for plan year does not exceed greater of –125% of ratio for all other eligible employees for preceding plan year or –lesser of (a) 200% of contribution % for all other eligible employees, or (b) such percentage plus 2 percentage points for the preceding plan year

Chapter 19 Employee Benefit & Retirement Planning Savings/Match Plan Copyright 2011, The National Underwriter Company10 Tax Implications if employer matching contributions must meet (a) or b)meet requirements for SIMPLE 401(k) c)utilize a safe harbor plan that, by design, satisfies -contribution requirement -notice requirement -matching contribution limitation

Chapter 19 Employee Benefit & Retirement Planning Savings/Match Plan Copyright 2011, The National Underwriter Company11 Tax Implications contribution requirement for safe harbor employer must make either -matching contributions that meet certain % limits -nonelective contributions for all employees equal to 3% or more of compensation

Chapter 19 Employee Benefit & Retirement Planning Savings/Match Plan Copyright 2011, The National Underwriter Company12 Tax Implications notice requirement for safe harbor plan before plan year begins, each eligible employee must be given written notice that -plan may be amended -if plan amended, notice will be given 30 days before last day of plan year

Chapter 19 Employee Benefit & Retirement Planning Savings/Match Plan Copyright 2011, The National Underwriter Company13 Tax Implications matching contribution limit for safe harbor plan met if –no employer match can be made for employee deferrals > 6% of compensation –rate of match does not increase as employee deferral rate increases –matching contribution rates for HCEs not greater than those for non-HCE

Chapter 19 Employee Benefit & Retirement Planning Savings/Match Plan Copyright 2011, The National Underwriter Company14 Tax Implications 5.some employers may be eligible for $500 tax credit for adopting a new plan 6.plan may allow employees to contribute to “deemed” IRA under the plan; such contributions will reduce amount can contribute to traditional IRAs or Roth IRAs 7.must follow rules for qualified plan distributions

Chapter 19 Employee Benefit & Retirement Planning Savings/Match Plan Copyright 2011, The National Underwriter Company15 Tax Implications 8.certain employees may be eligible for 10 year averaging 9.plan subject to ERISA reporting and disclosure rules

Chapter 19 Employee Benefit & Retirement Planning Savings/Match Plan Copyright 2011, The National Underwriter Company16 True or False? 1.Thrift plans are subject to the same dollar limits as elective deferrals. 2.Older employees benefit more from savings/thrift plans than younger employees. 3.Contributions to savings/thrift plans are made before- tax.

Chapter 19 Employee Benefit & Retirement Planning Savings/Match Plan Copyright 2011, The National Underwriter Company17 True or False? 4.Employees bear risk under a savings/thrift plan. 5.Administrative costs for savings/thrift plan are higher than for a profit share plan without employee contributions. 6.An employer can offer a plan that combines features of a regular profit sharing plan, a savings plan, and Section 401(k) salary reductions.

Chapter 19 Employee Benefit & Retirement Planning Savings/Match Plan Copyright 2011, The National Underwriter Company18 Discussion Question Evaluate the possible impact of the Roth 401(k) on savings plans (or ‘thrift plans’).