Retirement Plan Design
A successful retirement plan is one that meets your specific goals and your employees’ retirement objectives. We will review documents for an existing plan or work with you to design a new one that will meet your goals.
PLAN ADMINISTRATION AND RECORD KEEPING
TEFRA, Inc. provides complete administration and record-keeping for all of our plans, and will interface with daily valuation providers, where appropriate. We use the latest industry standard technology to provide you with clear, accurate reports.
TYPES OF PLANS
Retirement plans generally fall into one of two categories: Defined Contribution or Defined Benefit plans.
Under Defined Contribution plans, contributions can be made by you and/or your employees. Participants’ retirement benefits are based on the amount of the contributions and the performance of the investments. Each participant has his or her own account balance.
With a Defined Benefit plan, contributions are based on actuarial factors, compensation, age, and years of service for each employee. Benefits are generally defined as a percentage of compensation that will be provided for life upon retirement.
DEFINED CONTRIBUTION PLANS
Profit Sharing Plans
A profit-sharing plan allows the employer to make contributions to the retirement plans on a recurring basis, fully tax deductible and flexible. Contributions can be, and usually are, fully discretionary. Employers can contribute up to 25% of employee compensation, or up to a maximum dollar amount that is adjusted annually.
There are five commonly used formulas for allocating profit sharing contributions:
- Basic – The company contributes a percent of each employee’s salary, the same percentage for all employees.
- Integrated – The percentage allocated is higher for those with higher compensation, helping to off-set the inequity of the Social Security system.
- Age-Weighted – Older employees receive a higher percentage because they are closer to retirement.
- New Comparability – The company allocates different percentages to defined groups of employees.
- Points – Employees are assigned points for age, years of service, and salary; the company’s allocation is based on point totals.
401(k), 403(b), and 457 Plans
This is a popular type of profit-sharing plan that allows employees to defer part of their salary to their own retirement account, up to the maximum dollar amount set by the IRS. Taxes are not paid on this money when it is contributed, so the employee has less taxable income now. The money is taxed upon withdrawal at retirement, when the employee will be in a lower tax bracket. The company can match the employee’s contribution, and may also elect to contribute an additional amount.
Safe Harbor 401(k) Plans
This type of 401(k) allows highly compensated employees to defer the maximum amount, provided the company either:
- Matches the first 3% of non-highly-compensated employee deferrals at 100%, and the next 2% at 50%, OR
- Makes a 3% contribution for each eligible employee, whether or not the employee contributes.
Under the ROTH plan, the employee makes after-tax contributions to his or her retirement plan, thus it is not taxed upon withdrawal of funds, provided it is a qualified distribution. To qualify, a distribution must be made no sooner than five (5) years after the first contribution to the plan is made, providing:
- The first distribution is made after the employee reaches the age of 59 1/2
- Distributions are paid to the employee’s beneficiary upon the employee’s death, or
- The employee becomes disabled.
Money Purchase Pension Plans
With this type of plan, the company contributes an amount based solely on each employee’s compensation. The company elects to contribute an amount based on a fixed allocation formula. Once determined, the contribution becomes mandatory. These plans are popular with not-for-profit organizations.
DEFINED BENEFIT PLANS
These plans allow for a rapid accumulation of assets over a short period of time. Contributions are mandatory each year. They are subject to minimum funding requirements which are determined actuarially each year, and factor in such considerations as age, length of service, and compensation.
CAFETERIA PLANS (section 125)
This type of plan works well in conjunction with the company’s health and welfare plan. As the name suggests, the employee has greater flexibility in creating their benefits package, as they select from an array of options, such as group health care, group term life insurance, dependent care assistance, and medical reimbursement plans.