FAQ

PLAN TYPES

  • What is a Defined-Benefit Plan?

    A defined-benefit plan is a retirement plan that an employer sponsors, where employee benefits are computed using a formula that considers factors, such as length of employment and salary history. The company administers portfolio management and investment risk for the plan. There are also restrictions on when and by what method an employee can withdraw funds without penalties.

    These plans are also known as pension plans or qualified benefit plans. The plan is termed 'defined' because the formula for calculating the employer's contribution is known ahead of time. This fund is different from other pension funds, where the amount of payouts depends on the return of the funds invested. Therefore, if the returns from the investments set aside to fund the employee's retirement result in a funding shortfall, employers must tap into the company’s earnings to make up the difference.

  • What is a Cash Balance Pension Plan?

    A cash balance pension plan is a pension plan under which an employer credits a participant's account with a set percentage of his or her 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: as changes in the portfolio do not affect the final benefits to be received by the participant upon retirement or termination, the company solely bears all ownership of profits and losses in the portfolio.

    Although the cash balance pension plan is a defined-benefit plan, unlike the regular defined-benefit plan, the cash balance plan is maintained on an individual account basis, much like a defined-contribution plan. The cash balance plan acts similar to a defined-contribution plan also because changes in the value of the participant's portfolio does not affect the yearly contribution.

  • What is a 401(k)?

    A traditional 401(k) is an employer-sponsored plan that gives employees a choice of investment options. Employee contributions to a 401(k) plan and any earnings from the investments are tax-deferred. You pay the taxes on contributions and earnings when the savings are withdrawn. As a benefit to employees, some employers will match a portion of an employee’s 401(k) contributions. Income taxes on matching funds also are deferred until savings are withdrawn.

    A Roth 401(k) is an employer-sponsored investment savings account that is funded with after-tax money up to the contribution limit of the plan. This type of investment account is well-suited to people who think they will be in a higher tax bracket in retirement than they are now. The traditional 401(k) plan is funded with pretax money which results in a tax levy on future withdrawals.

  • What is a Roth 401(k)?

    Employee contributions are made using after-tax dollars with no income limitations to participate. A Roth 401(k) is subject to contribution limits based on the individual’s age. For example, the contribution limit for individuals up to age 50 in 2015 was $18,000 per year. Individuals older than 50 could contribute a total of $24,000 per year, and the additional $6,000 of eligible contribution room is called catch-up contributions. Withdrawals of any contributions and earnings are not taxed as long as the withdrawal is a qualified distribution. Distributions are required for individuals at least 70 ½ years old unless the individual is still employed and not a 5% owner of the business.

  • What is a 457 Plan?

    457(b) plans are IRS-sanctioned, tax-advantaged employee retirement plans offered by state and local public employers and some nonprofit employers. They are one of the least common forms of defined contribution retirement plans.

  • What is the difference between a 401(k) and 457 Plan?

    401(k) plans are considered qualified retirement plans and are therefore subject to the Employee Retirement Income Security Act of 1974 (ERISA). 457 plans, however, are a type of tax-advantaged non-qualified retirement plan and are not governed by ERISA.

    Since ERISA rules do not apply to 457 accounts, the IRS does not assess a "premature withdrawal" penalty to 457 participants who take withdrawals before age 59.5. The withdrawals are still subject to normal income taxes. Premature withdrawals from a 401(k) result in an additional 10% tax penalty.

    457 plans feature a "Double Limit Catch-up" provision that 401(k) plans do not. This provision is designed to allow participants who are nearing retirement to compensate for years in which they did not contribute to the plan but were eligible to do so. Thus, under the right conditions, a 457 plan participant may be able to contribute as much as $35,000 to his plan in one year.

    While both plans allow for early withdrawals, the qualifying circumstances for early withdrawal eligibility are different. Plan participants can make early withdrawals from a 401(k) under "financial hardships," which are defined by each 401(k) plan. With 457 accounts, hardship distributions are allowed after an "unforeseeable emergency," which must be specifically laid out in the plan's language.

    Both public government 457 plans and nonprofit 457 plans allow independent contractors to participate. Independent contractors are not eligible to participate in 401(k) plans.

  • How are 401(k) and 457 Plans similar?

    As defined contribution plans, both 401(k) and 457 plans are funded when employees contribute through payroll deductions; participants of each plan set aside a percentage of their salary to put into their retirement account. These funds pass to the retirement account without being taxed, unless the participant opens a Roth account, and any subsequent growth in the accounts is not taxed.

    As of 2014, both 401(k) and 457 plans have an annual maximum contribution limit of $17,500. For employees over the age of 50, both plans contain a "catch-up" provision that allows up to $5,500 in additional contributions. Contributions to each plan qualify the employee for a "Saver's Tax Credit." It is possible to take loans from both 401(k) and 457 plans.

  • Can You Contribute to 401(k) and 457 Plans Simultaneously?

    Since 457 plans are nonqualified retirement plans, it is possible to contribute to both a 401(k) and 457 plan at the same time. Many large government employers offer both plans. In such cases, the joint participant is able to contribute maximum amounts to both.

  • What is a Profit-Sharing Plan?

    A profit-sharing plan, also known as a deferred profit-sharing plan or DPSP, is a plan that gives employees a share in the profits of a company. Under this type of plan, an employee receives a percentage of a company's profits based on its quarterly or annual earnings. This is a great way for a business to give its employees a sense of ownership in the company, but there are typically restrictions as to when and how a person can withdraw these funds without penalties.

    A profit-sharing plan is any retirement plan that accepts discretionary employer contributions. This means a retirement plan with employee contributions, such as a 401(k) or something similar, is not a profit-sharing plan because of the personal contributions. Since a profit-sharing plan is created by an employer, it is up to the business as to how much it wants to allocate to each employee. Companies that offer a profit-sharing plan have the opportunity to adjust the plan as needed, sometimes making zero contributions in some years. In the years when contributions are made, however, a company must come up with a set formula for profit allocation.

  • What is a 403(b) Plan?

    A 403(b) plan is a retirement plan for specific employees of public schools, tax-exempt organizations and certain ministers. These plans can invest in either annuities or mutual funds. A 403(b) plan is another name for a tax-sheltered annuity (TSA) plan. The features of a 403(b) plan are comparable to those found in a 401(k) plan.

    Employees may make salary deferral contributions. However, they are bound by regulatory limits. Individual accounts in a 403(b) plan include an annuity contract, bought through an insurance company or a custodial account, which invests in mutual funds or a retirement income account established for church workers.

    Employees of tax-exempt organizations are eligible to participate in the plan. Participants include teachers, school administrators, professors, government employees, nurses, doctors and librarians. A TSA is another funding source for retirement in addition to a retirement plan or pension that helps employees meet their retirement goals. Many plans vest funds over a shorter period than 401(k) plans or may allow immediate vesting of funds.

  • What is a Qualified Deferred Compensation (NQDC) plan?

    Compensation that has been earned by an employee, but not yet received from the employer. Because the ownership of the compensation - which may be monetary or otherwise - has not been transferred to the employee, it is not yet part of the employee's earned income and is not counted as taxable income.

    NQDCs emerged because of the cap on contributions to government-sponsored retirement savings plans. High-income earners are unable to contribute the same proportional amounts to their tax-deferred retirement savings as average or low-income earners. NQDCs, therefore, are a way for high-income earners to defer the actual ownership of income and avoid income taxes on their earnings while enjoying tax-deferred investment growth.

  • What are Cafeteria Plans?

    A cafeteria Plan allows employees to pay certain qualified expenses (such as health insurance premiums) on a pre-tax basis, thereby reducing their total taxable income and increasing their spendable/take-home income.

  • How does a Qualified Domestic Relations Order (QDRO) work?

    A type of court order typically found in a divorce agreement that recognizes that the ex-spouse is entitled to receive a predefined portion of the individual's retirement plan. In most cases, the qualified domestic relations order (QDRO) allots 50% of the value of the assets gained from the beginning of the marriage to the time of the divorce to the ex-spouse.

    When the distribution goes to the ex-spouse, the ex-spouse becomes responsible for any taxes incurred when the money is distributed. However, if the individual does not receive a QDRO and decides to distribute the retirement-plan assets to his or her ex-spouse, the individual will still be responsible for the taxes on the ex-spouse's portion of the money, even though he or she no longer possesses it.


Accreditation

  • What kind of reports should I expect from my pension planning company?

    Maintaining the health of your plan necessitates regularly reviewing the plan to ensure that it is still compliant and on track to deliver what you need. In terms of reports, this may vary depending on the nature of your agreement with the pension plan administrator. At certain points in the process you could expect to see updates on the following:

    Plan Design Illustrations
    Plan Document & Summary Plan
    Plan Amendments
    Determination of Plan Contributions
    Plan Distributions
    Valuation Reports
    Employee Statements & Communication
    Summary Annual Reports
    Required Government Filings

  • How will I know if my plan is being administered properly?

    Ensuring that the people working on your plan are fully accredited is the starting point. What happens at time of filing returns?

  • Is there an independent body that oversees the pension planning market?

    No, there are professional associations who oversee education, accreditation and licensing. There is no single body that polices the industry. Which is why it’s so vital to ensure that the people working on your plan are fully qualified and experienced.

  • What qualifications should a pension planner hold?

    Background qualifications vary, the most important consideration is accreditation and how committed to ongoing training your pension planning company is. The goal posts are constantly moving in pension planning, as is the economy. Demand to see what accreditations the people working on your plan have.

  • What certifications should a pension planning company have?

    Sadly, the industry does not mandate accreditations for either the companies or people working inside them. That said, reputable companies seek out accreditation. Look for CEFEX certification which indicates the firm holds the highest level of fiduciary responsibility for every client.

  • Is there a way to test the quality of a pension plan?

    It’s hard to test the quality of a plan in isolation. There are so many variables inside the plan, combined with fluid economic conditions and everchanging tax regulations. The quality of your plan is directly linked to the quality of the people who design and administer it. Regular updates and health checks are the only way to ensure that your plan is on track to deliver what you need.

  • What types of accreditations should a pension plan administrator have?

    Accredited Pension Administrator (APA)
    Accredited Pension Representative (APR)
    Qualified Pension Administrator(QPA)
    Qualified 401(k) Administrator (QKA)
    Certified Retirement Administrator (CRA)
    Certified Retirement Counselor (CRC)
    Accredited Estate Planner (AEP) ®
    Enrolled Retirement Plan Agent (ERPA)
    Enrolled Actuary (EA)


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PLAN TYPES

  • What is a Defined-Benefit Plan?

    A defined-benefit plan is a retirement plan that an employer sponsors, where employee benefits are computed using a formula that considers factors, such as length of employment and salary history. The company administers portfolio management and investment risk for the plan. There are also restrictions on when and by what method an employee can withdraw funds without penalties.

    These plans are also known as pension plans or qualified benefit plans. The plan is termed 'defined' because the formula for calculating the employer's contribution is known ahead of time. This fund is different from other pension funds, where the amount of payouts depends on the return of the funds invested. Therefore, if the returns from the investments set aside to fund the employee's retirement result in a funding shortfall, employers must tap into the company’s earnings to make up the difference.

  • What is a Cash Balance Pension Plan?

    A cash balance pension plan is a pension plan under which an employer credits a participant's account with a set percentage of his or her 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: as changes in the portfolio do not affect the final benefits to be received by the participant upon retirement or termination, the company solely bears all ownership of profits and losses in the portfolio.

    Although the cash balance pension plan is a defined-benefit plan, unlike the regular defined-benefit plan, the cash balance plan is maintained on an individual account basis, much like a defined-contribution plan. The cash balance plan acts similar to a defined-contribution plan also because changes in the value of the participant's portfolio does not affect the yearly contribution.

  • What is a 401(k)?

    A traditional 401(k) is an employer-sponsored plan that gives employees a choice of investment options. Employee contributions to a 401(k) plan and any earnings from the investments are tax-deferred. You pay the taxes on contributions and earnings when the savings are withdrawn. As a benefit to employees, some employers will match a portion of an employee’s 401(k) contributions. Income taxes on matching funds also are deferred until savings are withdrawn.

    A Roth 401(k) is an employer-sponsored investment savings account that is funded with after-tax money up to the contribution limit of the plan. This type of investment account is well-suited to people who think they will be in a higher tax bracket in retirement than they are now. The traditional 401(k) plan is funded with pretax money which results in a tax levy on future withdrawals.

  • What is a Roth 401(k)?

    Employee contributions are made using after-tax dollars with no income limitations to participate. A Roth 401(k) is subject to contribution limits based on the individual’s age. For example, the contribution limit for individuals up to age 50 in 2015 was $18,000 per year. Individuals older than 50 could contribute a total of $24,000 per year, and the additional $6,000 of eligible contribution room is called catch-up contributions. Withdrawals of any contributions and earnings are not taxed as long as the withdrawal is a qualified distribution. Distributions are required for individuals at least 70 ½ years old unless the individual is still employed and not a 5% owner of the business.

  • What is a 457 Plan?

    457(b) plans are IRS-sanctioned, tax-advantaged employee retirement plans offered by state and local public employers and some nonprofit employers. They are one of the least common forms of defined contribution retirement plans.

  • What is the difference between a 401(k) and 457 Plan?

    401(k) plans are considered qualified retirement plans and are therefore subject to the Employee Retirement Income Security Act of 1974 (ERISA). 457 plans, however, are a type of tax-advantaged non-qualified retirement plan and are not governed by ERISA.

    Since ERISA rules do not apply to 457 accounts, the IRS does not assess a "premature withdrawal" penalty to 457 participants who take withdrawals before age 59.5. The withdrawals are still subject to normal income taxes. Premature withdrawals from a 401(k) result in an additional 10% tax penalty.

    457 plans feature a "Double Limit Catch-up" provision that 401(k) plans do not. This provision is designed to allow participants who are nearing retirement to compensate for years in which they did not contribute to the plan but were eligible to do so. Thus, under the right conditions, a 457 plan participant may be able to contribute as much as $35,000 to his plan in one year.

    While both plans allow for early withdrawals, the qualifying circumstances for early withdrawal eligibility are different. Plan participants can make early withdrawals from a 401(k) under "financial hardships," which are defined by each 401(k) plan. With 457 accounts, hardship distributions are allowed after an "unforeseeable emergency," which must be specifically laid out in the plan's language.

    Both public government 457 plans and nonprofit 457 plans allow independent contractors to participate. Independent contractors are not eligible to participate in 401(k) plans.

  • How are 401(k) and 457 Plans similar?

    As defined contribution plans, both 401(k) and 457 plans are funded when employees contribute through payroll deductions; participants of each plan set aside a percentage of their salary to put into their retirement account. These funds pass to the retirement account without being taxed, unless the participant opens a Roth account, and any subsequent growth in the accounts is not taxed.

    As of 2014, both 401(k) and 457 plans have an annual maximum contribution limit of $17,500. For employees over the age of 50, both plans contain a "catch-up" provision that allows up to $5,500 in additional contributions. Contributions to each plan qualify the employee for a "Saver's Tax Credit." It is possible to take loans from both 401(k) and 457 plans.

  • Can You Contribute to 401(k) and 457 Plans Simultaneously?

    Since 457 plans are nonqualified retirement plans, it is possible to contribute to both a 401(k) and 457 plan at the same time. Many large government employers offer both plans. In such cases, the joint participant is able to contribute maximum amounts to both.

  • What is a Profit-Sharing Plan?

    A profit-sharing plan, also known as a deferred profit-sharing plan or DPSP, is a plan that gives employees a share in the profits of a company. Under this type of plan, an employee receives a percentage of a company's profits based on its quarterly or annual earnings. This is a great way for a business to give its employees a sense of ownership in the company, but there are typically restrictions as to when and how a person can withdraw these funds without penalties.

    A profit-sharing plan is any retirement plan that accepts discretionary employer contributions. This means a retirement plan with employee contributions, such as a 401(k) or something similar, is not a profit-sharing plan because of the personal contributions. Since a profit-sharing plan is created by an employer, it is up to the business as to how much it wants to allocate to each employee. Companies that offer a profit-sharing plan have the opportunity to adjust the plan as needed, sometimes making zero contributions in some years. In the years when contributions are made, however, a company must come up with a set formula for profit allocation.

  • What is a 403(b) Plan?

    A 403(b) plan is a retirement plan for specific employees of public schools, tax-exempt organizations and certain ministers. These plans can invest in either annuities or mutual funds. A 403(b) plan is another name for a tax-sheltered annuity (TSA) plan. The features of a 403(b) plan are comparable to those found in a 401(k) plan.

    Employees may make salary deferral contributions. However, they are bound by regulatory limits. Individual accounts in a 403(b) plan include an annuity contract, bought through an insurance company or a custodial account, which invests in mutual funds or a retirement income account established for church workers.

    Employees of tax-exempt organizations are eligible to participate in the plan. Participants include teachers, school administrators, professors, government employees, nurses, doctors and librarians. A TSA is another funding source for retirement in addition to a retirement plan or pension that helps employees meet their retirement goals. Many plans vest funds over a shorter period than 401(k) plans or may allow immediate vesting of funds.

  • What is a Qualified Deferred Compensation (NQDC) plan?

    Compensation that has been earned by an employee, but not yet received from the employer. Because the ownership of the compensation - which may be monetary or otherwise - has not been transferred to the employee, it is not yet part of the employee's earned income and is not counted as taxable income.

    NQDCs emerged because of the cap on contributions to government-sponsored retirement savings plans. High-income earners are unable to contribute the same proportional amounts to their tax-deferred retirement savings as average or low-income earners. NQDCs, therefore, are a way for high-income earners to defer the actual ownership of income and avoid income taxes on their earnings while enjoying tax-deferred investment growth.

  • What are Cafeteria Plans?

    A cafeteria Plan allows employees to pay certain qualified expenses (such as health insurance premiums) on a pre-tax basis, thereby reducing their total taxable income and increasing their spendable/take-home income.

  • How does a Qualified Domestic Relations Order (QDRO) work?

    A type of court order typically found in a divorce agreement that recognizes that the ex-spouse is entitled to receive a predefined portion of the individual's retirement plan. In most cases, the qualified domestic relations order (QDRO) allots 50% of the value of the assets gained from the beginning of the marriage to the time of the divorce to the ex-spouse.

    When the distribution goes to the ex-spouse, the ex-spouse becomes responsible for any taxes incurred when the money is distributed. However, if the individual does not receive a QDRO and decides to distribute the retirement-plan assets to his or her ex-spouse, the individual will still be responsible for the taxes on the ex-spouse's portion of the money, even though he or she no longer possesses it.

scroll

Accreditation

  • What kind of reports should I expect from my pension planning company?

    Maintaining the health of your plan necessitates regularly reviewing the plan to ensure that it is still compliant and on track to deliver what you need. In terms of reports, this may vary depending on the nature of your agreement with the pension plan administrator. At certain points in the process you could expect to see updates on the following:

    Plan Design Illustrations
    Plan Document & Summary Plan
    Plan Amendments
    Determination of Plan Contributions
    Plan Distributions
    Valuation Reports
    Employee Statements & Communication
    Summary Annual Reports
    Required Government Filings

  • How will I know if my plan is being administered properly?

    Ensuring that the people working on your plan are fully accredited is the starting point. What happens at time of filing returns?

  • Is there an independent body that oversees the pension planning market?

    No, there are professional associations who oversee education, accreditation and licensing. There is no single body that polices the industry. Which is why it’s so vital to ensure that the people working on your plan are fully qualified and experienced.

  • What qualifications should a pension planner hold?

    Background qualifications vary, the most important consideration is accreditation and how committed to ongoing training your pension planning company is. The goal posts are constantly moving in pension planning, as is the economy. Demand to see what accreditations the people working on your plan have.

  • What certifications should a pension planning company have?

    Sadly, the industry does not mandate accreditations for either the companies or people working inside them. That said, reputable companies seek out accreditation. Look for CEFEX certification which indicates the firm holds the highest level of fiduciary responsibility for every client.

  • Is there a way to test the quality of a pension plan?

    It’s hard to test the quality of a plan in isolation. There are so many variables inside the plan, combined with fluid economic conditions and everchanging tax regulations. The quality of your plan is directly linked to the quality of the people who design and administer it. Regular updates and health checks are the only way to ensure that your plan is on track to deliver what you need.

  • What types of accreditations should a pension plan administrator have?

    Accredited Pension Administrator (APA)
    Accredited Pension Representative (APR)
    Qualified Pension Administrator(QPA)
    Qualified 401(k) Administrator (QKA)
    Certified Retirement Administrator (CRA)
    Certified Retirement Counselor (CRC)
    Accredited Estate Planner (AEP) ®
    Enrolled Retirement Plan Agent (ERPA)
    Enrolled Actuary (EA)