EMPLOYER A comparison of qualified retirement plans · PDF file Types of qualified retirement...
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A comparison of qualified retirement plans FOR EMPLOYER USE ONLY. NOT FOR USE WITH EMPLOYEES.
E M P LOY E R
Key employee – An employee who at any time during the plan year containing the determination date is:
1) an officer with annual compensation greater than $185,000; or
2) a more than 5% owner (family attribution rules apply); or
3) a more than 1% owner with annual compensation greater than $150,000 (family attribution rules apply).
Top-Heavy Plan – Occurs when, on the determination date (last day of prior plan year or, in the case of a plan’s first plan year, the last day of that plan year):
• in defined contribution plans, the total of the accounts of all key employees exceeds 60% of the total of all the accounts;
• in defined benefit plans, the present value of the accrued benefits of all key employees exceeds 60% of the present value of the accrued benefits of all employees;
• in IRS SARSEP (Form 5305A-SEP) plan, when more than 60% of all contributions go to key employees.
Safe Harbor 401(k) plans consisting solely of deferrals and Safe Harbor contributions are deemed to satisfy top-heavy rules.
SIMPLE plans that permit no contributions other than those required by Internal Revenue Code § 401(k)(11) are deemed to satisfy top-heavy rules.
• A minimum contribution to each non-key employee’s account who is a plan participant of up to 3% of compensation for defined contribution plans and SARSEPs; and a minimum benefit of up to 20% for defined benefit plans (2% of compensation per year of service, up to a maximum of 10 years) is required. If a non-key participant benefits under both a defined contribution and a defined benefit plan, the defined benefit plan can provide a minimum benefit of at least 2% of average annual compensation, not to exceed a total of 20%. However, if the employer chooses to have the defined contribution plan provide the top-heavy minimum benefit, the defined contribution plan must contribute at least 5%.
• Accelerated vesting:
Key employees and top-heavy requirements
FOR EMPLOYER USE ONLY. NOT FOR USE WITH EMPLOYEES.
Highly compensated employees (“HCEs”) for 2020 An employee is considered highly compensated if the employee:
1) was a more than 5% owner in either 2019 or 2020; or
2) an employee who earned over $125,000 in the preceding year (2019).* An employer may also elect to consider the top 20%** of employees as HCEs (the top-paid group).
* For the 2021 plan year, an employee who earns more than $130,000 in 2020 is an HCE. ** If the plan document defines HCE, then the top-paid group election must be a plan provision in the plan document. All plans of the employer
(and controlled group members) must adopt this election if one plan has made this election. This election applies to all tests.
percentage Graded schedule 2 years 20%
3 years 40% 4 years 60% 5 years 80% 6 years 100%
Cliff schedule 3 years 100%
FOR EMPLOYER USE ONLY. NOT FOR USE WITH EMPLOYEES.
Types of qualified retirement plans Profit Sharing Plans – and 401(k) Plans allow for a discretionary contribution by the employer. The 401(k), Safe Harbor 401(k) and SIMPLE 401(k) Plans include pre-tax employee salary deferrals.
• Profit Sharing Plan* • 401(k) Plan* • SIMPLE 401(k)* • Safe Harbor 401(k)*
Pension Plans – They offer a fixed commitment to provide a benefit or to make a contribution for the participant based on a stated formula in the plan:
• Cash Balance Plan • Defined Benefit Plan • Target Benefit Plan* • Money Purchase Plan*
Defined Contribution Plans – They are listed above with an asterisk (*), and have participant accounts which are subject to the earnings of the investments held by the plan. The retirement benefit is based on the accumulation of dollars in the participant’s account.
Defined Benefit Plans – They provide for a stated monthly retirement benefit which is funded by the employer. The plan costs are based on the assumptions set by an Enrolled Actuary. These plans are also covered by the Pension Benefit Guaranty Corporation (PBGC) (unless exempt). Fully Insured Defined Benefit Plans (412(i) plans) do not need an Enrolled Actuary.
Section 403(b) Plans – A deferred compensation program (also referred to as a tax sheltered annuity) which is a special type of retirement plan for public education organizations and certain tax-exempt organizations. A section 403(b) plan is not considered a“qualified plan” under IRC 401(a).
Section 457 Plan – a “nonqualified” deferred compensation Plan that is maintained by an eligible employer — which may be a State, a political subdivision of a State, an agency or instrumentality of a State or a tax-exempt organization. There are two types of plans under IRC Section 457: 457(b) plans and 457(f) plans. A 457(f) plan is often referred to as an "ineligible" 457 plan and may only be sponsored by a not-for-profit organization.
Other types of retirement plans Simplified Employee Plans – SEPs – This plan works like a profit sharing plan. The employer’s contribution is discretionary. Contributions go directly to a traditional retirement account or a traditional retirement annuity (SEP-IRA) of each eligible employee.
Salary Reduction Simplified Employee Pensions – Grandfathered SARSEPs – A SARSEP is a SEP set up before 1997 which allows eligible employees to make pre-tax salary deferrals into their IRA. No new SARSEPs may be established after 12/31/96.
SIMPLE IRAs – Allow employees to make pre-tax salary deferrals into a SIMPLE IRA account with an employer match or employer non-elective contribution.
SEP/SARSEP (1) SIMPLE IRA (2) SIMPLE 401(k) (3) Profit Sharing (4) 401(k) (5) Safe Harbor 401(k) (6) QACA5 (7) Money purchase (8) Defined Benefit (9) 403(b) (10) GOVERNMENTAL 457(b) (11) Deadline for establishing the Plan No later than due date (including
extensions) for filing employer’s tax return. (No new SARSEPs after 12/31/96.)
Generally, no later than Oct. 1 of a calendar year.1 Employer with 100 or fewer employees that does not maintain another qualified plan.
Same as (2) No later than plan year-end Same as (4) In general, a Safe Harbor 401(k) plan must be adopted before the beginning of the plan year, at least by October 1 for a calendar year plan.4
Same as (4) Same as (4) No later than plan year-end – does not have to match fiscal year No later than plan year-end No later than plan year-end
Deadline for making contribution Note: Employee salary deferrals should be deposited into the plan as soon as administratively feasible
Employer Required Contribution — no later than due date including extension for filing employer’s tax return.
Employee salary deferrals no later than 30 days following month withheld. Employer required contribution — same as (1).
Employee salary deferrals no later than 15 business days following month withheld.3 Employer required contribution — same as (1).
Same as (1) Same as (3) Same as (3) Same as (3) Contributions must be made no later than 8½ months after plan year-end.
Quarterly: by 15th day after each quarter of the plan year. Interest penalties are charged if paid later Annual: Contribution deadline is 8½ months after plan year-end
Non-ERISA (with only salary deferral) – no longer than is reasonable for proper administration ERISA – Employee salary deferrals no later than 15 business days following month withheld Employer contribution may be made any time during calendar year
457(b) (with only salary deferral contributions) – salary deferral ongoing from payroll. May include designated Roth program.
Maximum permitted eligibility requirements Eligibility requirements may always be less restrictive
Age 21 and worked for the employer at least 3 of the 5 preceding years; has received at least $600 in compensation in 2020 from the employer (subject to annual cost-of- living adjustments).
Must be offered to all employees who have compensation of at least $5,000 in any 2 preceding years (whether or not consecutive) and expected to receive at least $5,000 in current calendar year.
Age 21 and 1 year service (1,000 hours)
Age 21 and 1 year service (1,000 hours) with graded vesting or 2 years of service with 100% vesting
Age 21 and 1 year of service (1,000 hours) with graded vesting or 100% cliff vesting.
Age 21 and 1 year of service (1,000 hours)
Same as (6) Same as (4) Same as (4) Universal Availability requires all employees to be eligible to defer, with a few exceptions: • Work less than 20 hours per week • Eligible to participate in another 403(b), 401(k) or governmental 457(b) • Non-resident Alien
Non–Top-Heavy Contributions are immediately 100% vested.
Employer contributions and employee salary deferrals are immediately 100% vested.
Same as (2) 2 yrs. = 20% to 6 yrs. = 100% or 3 yrs. = 100%
Same as (4) and Employee salary deferrals are immediately 100% vested.
Employer required Safe Harbor contributions and Employee salary deferrals are 100% vested. All other employer contributions same as (5)
Deferrals 100% immediately vested Safe Harbor contributions subject to 2-year cliff Schedule
Same as (4) 2 yrs. = 20% to 6 yrs.