Employer Retirement Plans
An employer retirement plan is a benefit offered to employees by their employer or an employee organization, like a union. Most private-sector employer retirement plans are covered by the Employee Retirement Income Security Act (ERISA), which outlines protections for plan participants and beneficiaries. One of the more well-known examples is a 401(k) plan, which is named after the section of the tax code that created these plans. However, there are many other types of employer retirement plans.
Broadly speaking, employer retirement plans are classified as defined benefit or defined contribution plans, and qualified or nonqualified plans. Qualified plans are “qualified” for favorable tax treatment under IRS and ERISA requirements. Contributions and earnings within the plan are tax-deferred until they are withdrawn from the plan. Defined benefit plans specify the amount the employee will receive and are often referred to as “traditional pension” plans.
Defined contribution plans are funded by the employee, and employers may also contribute to the plan. However, the amount the employee will eventually receive is determined by the amount contributed to the plan, and by how well the plan’s underlying investments perform.
Types of Employer Retirement Plans
There are a wide range of employer-sponsored retirement plans, designed to fit different types of businesses and employees. Some of the more common types include:
Retirement planning has changed dramatically over the years, and one of the biggest areas of development has been in 401(k) plans. Established in 1978, 401(k) plans are named after the section of the tax code that created them. Originally, they were intended to supplement Social Security and traditional pension plans, but over the years since, 401(k) plans have become the primary vehicle for employees to save for retirement.
As 401(k) plans have grown, so has legislation to protect plan participants. Rules were established to make sure participants were treated fairly, that they are offered the best benefits available, and that conflicts of interest with plan sponsors and 401K advisors are minimized and disclosed.
As 401(k) plans evolved, plan sponsors started seeking professional help, both to administer the plans according to government and regulatory standards and help the company manage risks associated with the plan. There are a number of different types of plan advisors that assume part (but not all) of your fiduciary responsibilities and risk. It’s important to remember that plan sponsors always share in the fiduciary responsibility.
These qualified plans allow employees to contribute part of their earnings on a pre-tax basis. There are different types of 401(k) plans, including:
- Traditional 401(k)s allow eligible employees to make pre-tax contributions through payroll deductions, and employers can also contribute on the employee’s behalf.
- SIMPLE 401(k)s allow small businesses to offer retirement plans more cost-effectively to their employees, and can be set up by businesses that have 100 or fewer employees.
FiduciaryFirst has been helping corporations and government agencies manage their fiduciary risk for more than 25 years. FiduciaryFirst relies on the Prudent Fiduciary Process to efficiently manage your plan and help you work toward the ever-changing regulatory requirements. We help you outsource the fiduciary process while helping you address your goals for your employees and your retirement plan. Contact us today to learn more about our 401K advisory services at 866-625-4611.
Available to public schools and certain tax-exempt organizations, 403(b) plans are qualified plans that are similar to 401(k) plans and are funded through employee and employer contributions. 403(b) plans are a type of defined contribution retirement plan, and are usually established by public schools, universities, churches, charities, and other tax-exempt organizations. For the most part, 403(b) plans are very similar to the more well-known 401(k) plans. Just like 401(k) plans, 403(b) plans are named after the section of the tax code that created them. Although the 401(k) plan is now much better-known, 403(b) plans were actually created first, in 1958.
To qualify for a 403(b) plan, a tax-exempt organization must be a corporation, fund, or foundation, rather than a single individual or a partnership. 403(b) plans typically have less paperwork and lower administrative costs than other retirement plans. While 401(k) plans often have vesting schedules that are spread out over several years, most 403(b) plans vest immediately, or over a shorter period of time than 401(k) plans. Originally, 403(b) plan participants were restricted to investing in annuities, and 403(b) plans were often called tax-sheltered annuities or TSAs. However, in 1974 this restriction was lifted and 403(b) plans can also invest in traditional investment products.
Just like a 401(k) plan, 403(b) plans let employees of non-profit entities contribute part of their income to the plan on a tax-deferred basis. The deferred contribution are not subject to federal or state income tax until the plan participants take distributions. With 403(b) plans, the employer may also contribute to the plan along with the employee, but 403(b) plans can’t accept profit sharing, because they’re designed for non-profit organizations. If the employer does contribute, the plan must follow the rules set out by the Employee Retirement Income Security Act (ERISA). If the employer doesn’t contribute to the plan, the reporting rules are much less strict. For that reason, 401(k) plans offer employer matching at a much higher rate than 403(b) plans.
403(b) contributions are limited – for 2016 an employee can contribute up to $18,000, and employees who are 50 and older can make catch-up contributions of $6,000. Overall, the total contribution (employee and employer) for 2016 is limited to the lesser of $53,000 or 100 percent of the employee’s compensation for the most recent year. In addition to the catch-up provision for employees age 50 and older, some employees with at least 15 years of service can also make additional contributions of up to $3,000 each year. In some cases, both of these catch-up provisions apply and may allow the employee to make even more contributions.
Take advantage of your plan
401(a) & 457 Plans
Employees of cities, counties, water districts, or other similar municipal entities often have access to a special type of retirement plan through their employers. Called governmental 457 deferred compensation plans (often shortened to 457 plans), these programs allow employees to make contributions from their paychecks which are then invested in programs chosen by the employees. These plans are only available to state and local government employees, not federal employees.
Another type of 457 plan, called non-governmental 457 or “top hat” plans, can only be established by certain tax-exempt entities for the benefit of groups of highly-compensated employees (HCEs) or groups of executives, officers, directors, or officers. The top hat plans can’t be offered to regular employees.
Generally speaking, 457 plans are very similar to better-known retirement plans, like 401(k) plans or 403(b) plans. There are, however, some important distinctions. One is that 457 plans don’t have to be offered to all employees, as noted above. They are considered “non-qualified” plans, and are governed by different rules than 401(k) or 403(b) plans are.