Following is a list of Frequently Asked Questions from our Sponsors (click on a Question to reveal the Answer):
Q. How do I know what type of retirement plan is best for my company?
A. There are many factors to consider when selecting a retirement plan for your employees. We look at everything from the number of people you employ to the type of business you conduct. We also want to know what you’re looking to accomplish …do you want to maximize your contributions? Motivate people to save? After careful consideration of the facts, we will customize a plan that is best suited for you, the business, and your employees.
Q. What is a “qualified” Retirement Plan?
A. A qualified plan is a private retirement plan that meets the rules and regulations of the Internal Revenue Service. The most common types of qualified plans are profit sharing plans (including 401(k)plans), defined benefit plans, and money purchase pension plans. In general, your contributions are not taxed until money is withdrawn from the account.
Q. Who is a plan fiduciary?
A. A plan fiduciary is generally defined as a person (or company) that is legally responsible for managing and/or supervising the processes and money associated with a retirement plan. Companies who sponsor a retirement plan have a legal obligation to review providers and select those which best help to fulfill fiduciary responsibility. Such is the case for the company providing the investments as well as those providing the record keeping and custodial services. If you currently offer a 401(k) elsewhere and think it may be time to look at other providers, we’d be happy to conduct a free proposal to show you all the benefits TPC 401(k) can provide, and the improvements that can be made.
Q. What is compliance testing?
A. Some 401k plans must pass certain “nondiscrimination” tests each year to show they do not impermissibly discriminate in favor of HCEs with respect to plan benefits. The most common tests include The Actual Deferral Percentage (ADP) test, Actual Contribution Percentage (ACP) test, Minimum Coverage Test and Top-heavy test. While most employers hire a professional third-party administrator (TPA) to complete this work, all employers need testing basics to confirm all necessary tests are completed and any failed tests are corrected each year. Otherwise, costly penalties, plan disqualification or fiduciary liability are more likely. The good news? There are sure-fire ways to design your company retirement plan to avoid most if not all of these tests altogether. Contact us today to find out how!
Q. What are the common contribution types allowed within a retirement plan?
A. Retirement plans can provide for 4 types of contributions: employee contributions (typically Pre tax, Roth, or both); employer matching contributions based on employee contributions; employer profit sharing contributions; and rollover contributions. The way your plan is designed will specifically define the type of contributions available within your plan.
Q. What are the pros and cons of taking a loan from a 401(k) Plan?
A. Not every plan allows for loans, but if yours does, there are important items one should consider beforehand. Employees often consider borrowing money from their retirement plan when in need of funds quickly. Afterall, 401(k) loans do have a few perks. First…there’s no credit score required. You’re essentially your own creditor in that you’re borrowing the money from yourself, and then you repay the loan with automatic paycheck deductions over a maximum term – typically five years. And second, the interest rate attached to 401(k) payments is usually on the lower side, and all of the interest is paid back to your account. But there are also a few things to keep in mind. First, the money you borrow will not accumulate interest if it’s not in the account. For example, you borrow $20,000 from your 401(k) to be paid back in 5 years. Over the first 2 years your investments yield a 30% rate of return. The problem with that? The $20,000 was not in your account during that time, and thus, you missed out on all of that interest. For this reason, we tend to warn employees that loans due have the potential to really put a dent in your savings amount. Second, if you leave your employer before the loan is paid off, chances are the remaining balance will become taxable to you, and depending on your age, you may have to pay an IRS penalty as well. And third, remember that your payments are payroll deducted until the loan is paid off. In most cases you will not have the option to “stop” or “put off” payments for this. For this reason, employees will want to make absolutely sure that the payment is affordable and that the reason for borrowing is a valid one.
Q. What are the benefits of offering a 401(k) Plan?
A. The obvious answer to this question is that offering a 401(k) plan will allow you and your employees a better vehicle to save for retirement. But there are a few other advantages worth mentioning:
Attract the right people. More than half of small business owners say offering a plan helps attract better quality employees. What’s more – one-quarter of small business owners say that establishing a 401(k) plan was the result of employee demand and a similar percentage say departing employees frequently cite a lack of adequate retirement benefits as part of their reason for leaving! What it comes down to is this: when talented people are deciding between working for you or for someone else, having a retirement plan available could be the deciding factor.
Save some money!!! One of the best parts of having a retirement plan is the fact that all of the money you and your employees save and earn on investments is tax free until retirement. But THERE’s MORE. The best bonus might just be for the business owner. Owners can get a tax deduction for making contributions to their employee’s retirement accounts. The higher the amount, the higher the tax savings. In other words, you can compensate employees through retirement contributions all while taking a sizable tax deduction. Not only that, but if you have more than one employee you will also qualify for a $500 tax credit on the first three years of your business. That’s $1500 immediately that could help with startup costs.
Q. What is a MEP?
A. A MEP or “Multiple Employer Plan” is a 401(k) plan established under 413(c) of the Internal Revenue Code that allows employers who are unaffiliated with each other to adopt into a retirement plan sponsored by a third party that is responsible for administering the plan. In our case, TPC 401(k) is the Plan Sponsor & Trustee, and our clients are the adopting employers.
Q. Who is best Suited for the MEP option?
A. Any employer is eligible to participate in the MEP. The MEP is the right fit for companies that are looking to save money on administrative costs and to have relief from fiduciary responsibility. The MEP is most appealing to small businesses because of the administrative cost savings.
Q. How is the MEP different from a traditional 401(k)?
A. Overall, you’ll find the MEP to be more cost-effective than a traditional 401(k) plan. For one thing, you won’t have to handle the administrative costs associated with managing your own plan. Secondly, we choose from investment funds that generally have lower fees. And lastly, the MEP allows you to take advantage of the economies of scale for lower pricing than with an individual plan. In other words, it can be more cost effective to be part of a group rather than if you are on your own.
Q. Can plan design be customized within the MEP?
A. Absolutely. Part of our process is to design a plan with your specific goals in mind. Each client completes their own adoption agreement. They also choose their own vesting schedule, company match, eligibility requirements and whether they would like to offer loans or a Roth option.
Q. What goes into the process of establishing a retirement account for my employees?
A. We’ve been in this industry for a long time. We know that many 401(k) policies can be difficult to create. That’s where we make the difference. At TPC we offer more streamlined and automated options for 401(k) plans with the goal to make this process easy and simple. We want you, the small business owner, to concentrate on what you’re good at: running your business. We understand that a retirement plan is not the only thing on your mind…but it IS the only thing on ours. We can walk you through the process step by step, ensuring all of your objectives are met.