It's never too late or too early to start an Employer Sponsored Plan, to allow your employees an opportunity to plan for retirement. BSB Consultants offers expert advice on building the proper retirement plan for your organization.
If you have a current Retirement Plan, BSB Consultants will provide a free evaluation, to ensure that your plans are compliant and the fees you are paying are competitive.
TYPS OF PLANS
401(K) PLANS
What is a 401(k) plan and how does it work?
A 401(k) plan is an employer-sponsored defined-contribution pension account defined in subsection 401(k) of the Internal Revenue Code. Employee funding comes directly off their paycheck and may be matched by the employer. There is an annual contribution limit of $19,500 for 2021 ($26,000 for those age 50 or older).In a traditional 401(k), employee contributions reduce their income taxes for the year they are made, but their withdrawals are taxed beginning at age 59 ½ with no penalty for use in retirement. At this time, it is assumed that the employee may not be earning at the same level and so his withdrawn funds will be taxed at his now lower rate.
403(b) PLANS
What is a 403(b) Plan?
403(b) plans are retirement savings plansthat can only be established by a public school system or a tax-exempt organization as described in IRS code section 501(c)(3), such as nonprofit hospitals, charities or religious organizations.
Two types of 403(b) retirement plans are available:
- ERISA (Employee Retirement Income Security Act) 403(b) plans – Most 501(c)(3) nonprofit organizations, with the exception of churches and certain qualified religious-controlled organizations, are subject to ERISA. They require an annual IRS Form 5500 filing and are subject to certain ERISA non-discrimination testing requirements.
- Non-ERISA 403(b) plans – The plans are salary deferral agreements between individuals and designated plan providers. Only public education institutions and governmental nonprofit organizations can offer non-ERISA plans, as they are exempt from ERISA. Churches and certain religious-controlled organizations are exempt unless they officially elect to be covered under ERISA.
Profit sharing plans
A profit-sharing plan is a retirement plan that gives employees a share in the profits of a company. Under this type of plan, also known as a deferred profit-sharing plan (DPSP), an employee receives a percentage of a company's profits based on its quarterly or annual earnings.
Cash Balance Plans
What Is a Cash Balance Pension Plan?
A cash balance pension plan is a pension plan with the option of a lifetime annuity. For a cash balance plan, the employer credits a participant's account with a set percentage of their yearly compensation plus interest charges.
A cash balance pension plan is a defined-benefit plan. As such, the plan's funding limits, funding requirements, and investment risk are based on defined-benefit requirements. Changes in the portfolio do not affect the final benefits received by the participant upon retirement or termination, and the company bears all ownership of profits and losses in the portfolio.
KEY TAKEAWAYS
- A cash balance pension plan is one in which participants receive a set percentage of their yearly compensation plus interest charges.
- The benefit of such plans is that contribution limits increase with age.
- People 60 years and older can save well over $200,000 annually in pretax contributions compared.
- Meanwhile, for a 401(k), total employer and employee contributions for those 50 and older are limited to $64,500 in 2021 ($63,500 in 2020).
Deferred compensation plans
What Is Deferred Compensation?
Deferred compensation is a portion of an employee's compensation that is set aside to be paid at a later date. In most cases, taxes on this income are deferred until it is paid out. Forms of deferred compensation include retirement plans and stock-option plans.
KEY TAKEAWAYS
- Deferred compensation plans are an incentive that employers use to hold onto key employees.
- Deferred compensation can be structured as either qualified or non-qualified.
- The attractiveness of deferred compensation is dependent on the employee's personal tax situation.
- These plans are best suited for high earners.
- The main risk of deferred compensation is if the company goes bankrupt you may lose everything put away in the plan.
How Deferred Compensation Works
An employee may opt for deferred compensation because it offers potential tax benefits. In most cases, income tax is deferred until the compensation is paid out, usually when the employee retires. If the employee expects to be in a lower tax bracket after retiring than when they initially earned the compensation, they have a chance to reduce their tax burden.
Roth 401(K)s are an exception, requiring the employee to pay taxes on income when it is earned. They may be preferable, however, for employees who expect to be in a higher tax bracket when they retire and would therefore rather pay taxes in their current, lower bracket. There are many more factors that affect this decision, such as changes to the law. In 2019, the highest federal tax rate was 37%—just over half what it was in 1975.
