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Copyright 2010 Powers Financial Group: 401(k) Plan. All Rights Reserved.
FAQ
The number of questions you may have regarding a 401(k) plan or other retirement plan could be in the hundreds, such is the enormous scope of ERISA law. Here is a small sample of some of the most significant FAQs. For answers to specific questions, e-mail us at gcasey@powersfinancialgroup.com
What is a qualified retirement plan?
A retirement plan is "qualified" if it satisfies the requirements of Internal Code Section 401(a). Qualified status allows the plan to enjoy tax favored treatment. The contributions made by the employer are generally deductible, and participant deposits are excludable from state and federal taxation until withdrawn. Qualified plans predominate (as opposed to nonqualified plans) in the current market. The most recognizable type of plan - the 401(k) plan - is qualified.
What is a 401(k) Plan?
A 401(k) plan is a type of defined contribution pension plan known as a profit sharing plan. 401(k) is the section of the Internal Revenue Code which defines cash or deferred arrangements. A CODA is a component of a plan which allows participants to defer some of their salary into the plan. The money deferred is not subject to current federal and state taxation. A 401(k) plan allows the sponsoring employer to "match" salary deferrals and to add an additional source of contribution known as non-elective contributions.
Why are 401(k) plans so popular these days?
Employees like 401(k) plans because they allow for an immediate tax break on salary deferred to the plan. Most plans allow for very flexible deferrals amounts with the ability to stop making deferrals at any time. They money deferred is always 100% vested and most plans allow for various options for early withdrawals for specific financial needs. Funds left in a plan for many years, even at a moderate rate of return, can grow very substantially. Employers like 401(k) plans because the plan is partially funded by the participants. Employer related contributions are generally discretionary, allowing great flexibility. Since 401(k) plans are so popular, having one is a visible and understandable employee benefit which many employers use as a strong recruiting inducement.
Who is responsible for operating the plan?
By law, the plan administrator is responsible for maintaining the qualified status of a retirement plan. For small and medium sized companies, the plan administrator is usually an employee/officer of the company. Plan administrators are required to carry out many regular fiduciary and ministerial functions. Such functions include: nondiscrimination testing, contribution calculations, trust accounting, government reporting, participant disclosure, distribution calculations and reporting, loan calculations and processing, participant education and notices. Of course, plan administrators are not ERISA lawyers. That is why companies hire third party administrators - like Powers Financial Group!
What are matching contributions and how do they work?
Matching contributions are deposits made by the employer sponsor of a 401(k) plan. Matching contributions come out of the company's pocket! By definition matching contributions are based on employee salary deferrals. Employees who choose not to make salary deferrals (employees are always free to refrain from or to stop making salary deferrals at any time) will not receive matching contributions. The primary purpose of matching contributions is to act as an incentive/reward for participating in the 401(k) plan. If employees know that their salary deferrals will be matched (matching formulas can be very generous - dollar for dollar for example!) they are more likely to participate in the plan. Matching money can also act like a financial "handcuff." Employers are allowed to impose a vesting schedule on matching funds. Starting in 2002 matching funds can be fully vested in six years. Participants who leave the company and request a withdrawal of their funds may lose the unvested portion of their matching account.
What is a Profit Sharing Plan?
The answer is simple but it often causes confusion. 401(k) plans are profit sharing plans. When people use the phrase profit sharing plan, they are usually referring to a profit sharing plan that does not contain a cash or deferred arrangement - i.e. the 401(k) feature. Today practitioners often use the phrase traditional profit sharing plan to describe a plan that does not contain a 401(k) feature. A traditional profit sharing plan has only one source of contributions, i.e. all contributions to the plan come from the employer - employees are not allowed to defer any of their salary into the plan. Aside from this important difference in funding methods, traditional profit sharing plans contain many of the same characteristics as 401(k) plans. They are simpler in nature and usually carry lower operating costs while delivering many of the same benefits as the more complicated 401(k) plan.
What is a Safe Harbor Plan?
Safe Harbor plans are 401(k) plans that contain a few special features. When a plan sponsor makes the "safe harbor election," the plan is relieved of some of the nondiscrimination testing requirements otherwise required of regular 401(k) plans. For some plans this is welcome relief indeed. Companies that have certain employee demographic issues (ratio of highly paid to non-highly paid employees, etc.) have often "failed" certain tests before the safe harbor rules were enacted. By agreeing in advance to make certain specific contributions and providing notices to employees, SH plans never fail tests because they are simply not subject to the tests anymore!
Fair enough, now why should we hire Powers Financial Group as our third party administrator?
Hopefully, part of the answer is implicit in the others. PFG is a no nonsense, no frills company devoted exclusively to qualified plan consulting and administration. We do not rely on aggressive marketing and high pressure sales to provide quality service. We simply know the work. We realize that no amount of "sizzle" will satisfy your need for service. Ultimately plan sponsors need the "steak." Please give us a call so we can answer all of your questions about sponsoring a 401(k) plan or other type of defined contribution pension plan.
Frequently Asked Questions About Sponsoring a 401(k) Plan
Contact Us
Powers Financial Group
Phone:
860-836-0106
Address:
160 Hunt Circle
Texarkana, TX 75501
Email:
We offer the following services:
- Plan Design
- Implementation
- Administration
- Consulting
- Continued Education
