Savings/Match Plan
Chapter 19
Employee Benefit & Retirement Planning
What is it?
a qualified defined contribution plan
– similar to a profit sharing plan
– provides for and encourages after-tax employee
contributions to plan
– can have employer matching contributions
– often part of profit share or 401(k) plan
– may be replaced by Roth IRA
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Savings/Match Plan
Chapter 19
Employee Benefit & Retirement Planning
When is it indicated?
1. as add on to Sec. 401(k) to allow employees to
increase contributions beyond annual limit on salary
reductions for Sec. 401(k)
2. employees are
– young
– willing to assume investment risk
– varied in need or desire for retirement savings
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Savings/Match Plan
Chapter 19
Employee Benefit & Retirement Planning
When is it indicated?
3. employer wants to supplement company defined
benefit plan with plan that uses individual accounts
and allows employees to save tax-deferred
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Savings/Match Plan
Chapter 19
Employee Benefit & Retirement Planning
Advantages
1. tax deferred savings for employees
2. employees choose amount to contribute
3. lump-sum distributions may be eligible for special 10
year averaging
4. individual participant accounts - participants benefit
from profitable plan investments
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Savings/Match Plan
Chapter 19
Employee Benefit & Retirement Planning
Disadvantages
1. inadequate retirement savings
2. employees bear investment risk
3. administrative costs higher than alternatives (e.g.
money purchase plan or profit sharing plan)
4. limit on annual additions may be too low for highly
compensated
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Savings/Match Plan
Chapter 19
Employee Benefit & Retirement Planning
Design Features
• voluntary participation
• after tax employee contributions w/ employer match
• vesting requirements of employer match same as
top-heavy plans - 3 year cliff or 2-6 gradual vesting
• plan must meet nondiscrimination requirements
• generous provision for employee fund withdrawal or
loans
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Savings/Match Plan
Chapter 19
Employee Benefit & Retirement Planning
Design Features
• plan can allow participant-investment direction; if
regulations satisfied, plan trustee and employer
relieved of fiduciary liability
• employers can offer plans that combine features of
-
regular profit sharing plan
-
savings plan
-
Section 401(k) salary reductions
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Savings/Match Plan
Chapter 19
Employee Benefit & Retirement Planning
Tax Implications
1. employer contributions deductible when made
2. employee contributions
-
NOT tax deductible
tax deferred until distributed
3. to be deemed nondiscriminatory, must meet actual
contribution percentage test (ACP)
4. can meet ACP test in alternative ways
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Savings/Match Plan
Chapter 19
Employee Benefit & Retirement Planning
Tax Implications
for employee contributions
a) for HCEs, average ratio of employee contributions +
employer matching contributions to compensation for
plan year does not exceed greater of
i.
125% of ratio for all other eligible employees for preceding
plan year or
ii. lesser of (a) 200% of contribution % for all other eligible
employees, or (b) such percentage plus 2 percentage
points for the preceding plan year
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Savings/Match Plan
Chapter 19
Employee Benefit & Retirement Planning
Tax Implications
if employer matching contributions must meet (a) or
b) meet requirements for SIMPLE 401(k)
c) utilize a safe harbor plan that, by design, satisfies
-
contribution requirement
-
notice requirement
-
matching contribution limitation
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Savings/Match Plan
Chapter 19
Employee Benefit & Retirement Planning
Tax Implications
contribution requirement for safe harbor
• employer must make either
-
matching contributions that meet certain % limits
-
nonelective contributions for all employees equal to 3% or
more of compensation
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Savings/Match Plan
Chapter 19
Employee Benefit & Retirement Planning
Tax Implications
notice requirement for safe harbor plan
• before plan year begins, each eligible employee
must be given written notice that
-
plan may be amended
-
if plan amended, notice will be given 30 days before last
day of plan year
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Savings/Match Plan
Chapter 19
Employee Benefit & Retirement Planning
Tax Implications
matching contribution limit for safe harbor plan met
if
i. no employer match can be made for employee deferrals >
6% of compensation
ii. rate of match does not increase as employee deferral rate
increases
iii. matching contribution rates for HCEs not greater than those
for non-HCE
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Savings/Match Plan
Chapter 19
Employee Benefit & Retirement Planning
Tax Implications
5. some employers may be eligible for $500 tax credit
for adopting a new plan
6. plan may allow employees to contribute to “deemed”
IRA under the plan; such contributions will reduce
amount can contribute to traditional IRAs or Roth
IRAs
7. must follow rules for qualified plan distributions
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Savings/Match Plan
Chapter 19
Employee Benefit & Retirement Planning
Tax Implications
8. certain employees may be eligible for 10 year
averaging
9. plan subject to ERISA reporting and disclosure rules
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Savings/Match Plan
Chapter 19
Employee Benefit & Retirement Planning
True or False?
1. Thrift plans are subject to the same dollar limits as
elective deferrals.
2. Older employees benefit more from savings / thrift
plans than younger employees.
3. Contributions to savings / thrift plans are made
before-tax.
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Savings/Match Plan
Chapter 19
Employee Benefit & Retirement Planning
True or False?
4. Employees bear risk under a savings / thrift plan.
5. Administrative costs for savings / thrift plan are
higher than for a profit share plan without employee
contributions.
6. An employer can offer a plan that combines features
of a regular profit sharing plan, a savings plan, and
Section 401(k) salary reductions.
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Savings/Match Plan
Chapter 19
Employee Benefit & Retirement Planning
Discussion Question
Evaluate the possible impact of the Roth 401(k) on
savings plans (or ‘thrift plans’).
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