Introduction to Retirement Plans

The importance of routinely setting aside savings makes the Retirement Plan one of the most valuable long-term benefits that employers can offer their employees. An employer-provided retirement plan can be an easy, automatic way for employees to save money for retirement from each of their paychecks. Many employees today also expect their workplace to offer some form of retirement benefit. As you will see, largely through tax savings, federal law encourages both employers and employees to participate in retirement plans.  Employers that sponsor retirement plans also have serious responsibilities with their plans. Compliance rules can vary from quite minimal with Payroll Deduction and SIMPLE IRAs, to highly complex in the case of defined benefit plans. 

The following is not a legal interpretation of ERISA, nor is it intended to be a substitute for the advice of a retirement plan professional.

Essential Elements of a Retirement Plan

Each retirement plan has certain key elements. These include:

• A written plan that describes the benefit structure and guides day-to-day operations;
• A trust fund to hold the plan’s assets;
• A recordkeeping system to track the flow of monies going to and from the retirement plan; and
• Documents to provide plan information to employees participating in the plan and to the government.

Employers often hire outside professionals (sometimes called third-party service providers) or, if applicable, use an internal administrative committee or human resources department to manage some or all of a plan’s day-to-day operations. Indeed, there may be one or a number of officials with discretion over the plan. These are the plan’s fiduciaries.

The following is an overview from the IRS regarding a number of different retirement plans:   

Plans with IRAs

• Participant’s retirement benefits based on participant’s account balance
• Some plans may allow employees to contribute
• Depending on the type of plan, employer may be required to make annual minimum contributions
• Contribution limits of $5,000 to $49,000, depending on the type of plan
• Depending on the type of plan, must cover some or all of the employees in all your businesses
• Easy to set up and operate
• No annual return required
• Annual nondiscrimination testing not required
• Little design flexibility
• No loans allowed
• Immediate vesting of all contributions

401(k) and Profit-Sharing Plans

• Participant's retirement benefits based on participant’s account balance
• May allow employees to contribute through salary deferrals
• Depending on the type of plan, employer may be required to make annual minimum contributions
• Contribution limits
• Must meet minimum coverage tests but can exclude some employees
• More complex to set up and operate
• Annual return usually required
• May require annual nondiscrimination testing
• Greater design flexibility
• Loans and hardship withdrawals allowed
• May delay vesting of some employer contributions