Employee Benefits - 401K and Pension Plans

iMethods rounds out its employee benefit product portfolio with retirement programs that can be implemented very cost effective with the smallest number of employees. In accordance with the IRS Code employers can offer several types of programs to their employees as well as offer the employee access to individual IRA type accounts. All of these programs require information that cannot be conveniently provided using our IT system at this time. Therefore, we have provided herein the different plan types for your review and ask that use the navigation to the left to obtain more detail information about each plan. iMethods experienced account executives will help you understand the fundamentals of building your benefit program. Please contact us for any assistance you require.

A SIMPLE IRA plan is a retirement plan that uses SIMPLE IRAs for each eligible employee. SIMPLE IRAs are the individual retirement accounts or annuities into which the contributions must be deposited. Under a SIMPLE IRA plan, a SIMPLE IRA must be set up for each eligible employee. The following requirements must be met to be considered an eligible employee.

A 401K plan is established and maintained by an employer to provide retirement benefits to employees with favorable tax treatment for the employer and the employees. Frequently funded by insurance plans. Sections 401 through 419 of the Internal Revenue Code established requirements for a qualified plan and set forth the tax treatment thereof.

Employee Retirement Income Security Act :Known as ERISA, a federal law, passed in 1974, establishing government requirements for private pension and profit-sharing plans, including vesting requirements, funding mechanisms and general plan descriptions. The law also specifically increased the tax deduction limits available to self-employed individuals utilizing Keogh plans, raising the dollar limit from $2,500 to $7,500 and the percentage limit from 10 percent to 15 percent. The Economic Recovery Tax Act increased these deductible limits in 1981; the Tax Reform Acts of 1984 and 1986 raised the limits even further. Currently, the maximum deductible amount is the lesser of 25 percent of compensation or $30,000.

The Self-Employed Individuals Tax Retirement Act (Keogh Act or HR10), originally passed by Congress in 1962 and since amended several times, enabling self-employed individuals to establish and fund tax-favored individual retirement plans similar to those available to corporations. The Keogh Act Plan under the Self-Employed Individuals Tax Retirement Act permits a self-employed individual to establish a formal retirement plan and obtain tax advantages similar to those available under qualified corporate pension plans.

A qualified employer plan set up by a self-employed individual is sometimes called a Keogh or HR-10 plan. A sole proprietor or a partnership can establish a Keogh plan. A common-law employee or a partner cannot establish a Keogh plan. The plans described here can also be established and maintained by employers that are corporations, and all the rules discussed here apply to corporations, except where specifically limited to the self-employed.
The plan must be for the exclusive benefit of employees or their beneficiaries. A Keogh plan includes coverage for a self-employed individual. For Keogh plan purposes, a self-employed individual is both an employer and an employee. As an employer, you can usually deduct, subject to limits, contributions you make to a Keogh plan, including those made for your own retirement. The contributions (and earnings and gains on them) are generally tax-free until distributed by the plan.

Kinds of Plans
There are two basic kinds of Keogh plans -- defined contribution plans and defined benefit plans -- and different rules apply to each. You can have more than one Keogh plan, but your contributions to all the plans must not total more than the overall limits discussed under Contributions and Employer Deduction, later; Defined Contribution Plan.

A defined contribution plan provides an individual account for each participant in the plan. It provides benefits to a participant largely based on the amount contributed to that participant's account. Any income, expenses, gains, losses, and any forfeiture of other accounts that may be allocated to an account also affect benefits. A defined contribution plan can be either a profit sharingor a money purchase pension plan.

Profit-sharing plan. A profit-sharing plan is a plan for sharing your business profits with your employees. However, you do not have to make contributions out of net profits to have a profit-sharing plan. The plan does not need to provide a definite formula for figuring the profits to be shared. But, if there is no formula, there must be systematic and substantial contributions. The plan must provide a definite formula for allocating the contribution among the participants, and for distributing the accumulated funds to the employees after they reach a certain age, after a fixed number of years, or upon certain other occurrences. In general, you can be more flexible in making contributions to a profit-sharing plan than to a money purchase pension plan (discussed next) or a defined benefit plan (discussed later). But the maximum deductible contribution may be less under a profit-sharing plan (see Limits on Contributions and Benefits, later). Forfeitures under a profit-sharing plan can be allocated to the accounts of remaining participants in a nondiscriminatory way, or they can be used to reduce your contributions.

Money purchase pension plan. Contributions to a money purchase pension plan are fixed and are not based on your business profits. For example, if the plan requires that contributions be 10% of the participants' compensation without regard to whether you have profits (or the self-employed person has earned income), the plan is a money purchase pension plan. This applies even though the compensation of a self-employed individual as a participant is based on earned income derived from business profits.

A defined benefit plan is any plan that is not a defined contribution plan. Contributions to a defined benefit plan are based on a computation of what contributions are needed to provide definitely determinable benefits to plan participants. Actuarial assumptions and computations are required to figure these contributions. Generally, you will need continuing professional help to have a defined benefit plan. Forfeitures under a defined benefit plan cannot be used to increase the benefits any employee would otherwise receive under the plan. Forfeitures must be used instead to reduce employer contributions.

SEP plan. SEPs provide a simplified method for you to make contributions to a retirement plan for your employees. Instead of establishing a profit sharing or money purchase plan with a trust, you can adopt a SEP agreement and make contributions directly to an individual retirement account or an individual retirement annuity (SEP-IRAs) established for each eligible employee.

SIMPLE plan. An employer who had 100 or fewer employees who earned at least $5,000 in compensation for the preceding calendar year and meets certain other requirements can set up a SIMPLE plan. Under a SIMPLE plan, employees can choose to make salary reduction contributions rather than receiving these amounts as part of their regular compensation. In addition, you will contribute matching or nonelective contributions. The two types of SIMPLE plans are the SIMPLE IRA plan and the SIMPLE 401(k) plan.