Employee benefits and retirement

One of the most appealing and effective
employee benefits that employers
offer is the 401(k) plan. This qualified retirement plan features a salary deferral
plan and has become extraordinarily popular among employers.

There are several reasons to consider this
great benefit. Employees share in the cost
of retirement savings, and any contributions made by the employer are tax
deductible. 401(k) plans can be designed to
meet a wide variety of business, tax and
personal objectives. These plans give your
employees the opportunity to become
actively involved in saving for their retirement and selecting their own investments.

Smart Business talked to Sarah
Gherman, an agent with Sapoznik
Insurance about the importance of offering
additional benefits to effectively strengthen an employee benefits plan.

What are some 401(k) plan basics every
employer should know?

A 401(k) plan allows employees to regularly set aside a portion of their compensation in an individual retirement account for
their benefit. Employees can usually direct
the investment of their plan contributions
— and any employer contributions the company chooses to make — in one or more of
the investment options offered by their plan.
All amounts that are paid into the plan, as
well as all plan earnings on contributions,
grow tax-deferred until the participant
receives them at retirement. Since income
taxes are deferred, plan assets can grow and
compound at a substantially higher rate
than comparable taxable investments.

In general, participants become eligible
to begin taking distributions when they
reach age 59 1/2. Nonetheless, there are
several circumstances — such as death,
disability or termination of employment —
under which participants can make withdrawals before they reach retirement age.
Employers also can add plan provisions for
hardship distributions and loans.

What are some of the employer requirements?

There are participation and special nondiscrimination rules that 401(k) plans
must meet if they are to retain their tax-qualified status.

  • You must provide a written plan, which
    specifies who may participate and how
    contributions will be allocated among
    employees.

  • You cannot deny participation to eligible employees age 21 or over who have at
    least one year of service.

  • Employee contributions are always
    100 percent vested.

  • Your plan may not discriminate in favor
    of highly compensated employees (HCEs).
    An HCE is an employee who: (1) was a 5
    percent owner of the employer at any time
    during the current year or preceding year
    or (2) had compensation of more than
    $85,000 for the preceding year (indexed for
    inflation) and, if the employer should so
    elect, was in the top 20 percent of employees by compensation for the year.

Describe some additional retirement plan
characteristics to look for that can benefit
employers and employees alike.

Flexibility. The primary benefit for
employers is the high degree of flexibility
in the structure and operation of a 401(k) plan. An employer may have the ability to
not only provide a cost-effective employee
benefit but, at the same time, maximize
benefits for the owners and other highly
compensated individuals.

Employer match. As an employer, you
can choose to match, or not match, a percentage of your employees’ contributions.
The match is typically used as an incentive
to encourage contributions by employees.
Numerous employer surveys have shown
that as little as a 20 percent employer
match for every dollar contributed substantially increases participation levels.

Other options. You can structure your
401(k) plan to offer:

  • loan options, allowing participants to
    borrow from their accounts at no tax consequence as long as repayment is made in
    a timely fashion; and

  • a hardship distribution option that
    allows participants to withdraw funds —
    subject to a 10 percent excise tax for
    employees under age 59 1/2 — to buy a
    home or pay for medical or education
    expenses.

Flexible vesting. You have some flexibility in deciding on how long you require
employees to work for your business
before they become fully entitled to or
vested in employer contributions, matching and profit-sharing contributions.
However, tax law limits apply. It is not
uncommon to provide full entitlement over
six years. With a six-year vesting schedule,
your employees would be entitled to 20
percent of employer contributions with
two years of service, 40 percent with three
years, 60 percent with four years, and so
on.

Administrative structure. You have a
number of choices when it comes to the
administration of your plan. One-stop
shopping for all plan services is not the
only way to go, nor is it necessarily the best
way. Many employers choose an independent plan administrator to design a plan that
meets their specific objectives and to handle the numerous details of plan administration and consulting.

SARAH GHERMAN is an agent with Sapoznik Insurance. Reach
her at sarahf@[email protected] or (877) 948-8887.

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