Retirement Independence by Design

Each year the U.S. government adjusts the limits for qualified plans and Social Security to reflect cost of living adjustments and changes in the law. Many of these limits are based on the "plan year" as defined in the plan document. The elective deferral and catch-up limits are always based on the calendar year.


Compensation:


2017 - $270,000

2016 - $265,000
2015 - $265,000


Benefits & Contributions


DC Plans:

2017 - $54,000

2016 - $53,000
2015 - $53,000

DB Plans:

2017 - $215,000

2016 - $210,000
2015 - $210,000

SIMPLE Plan Deferrals:
2017 - $12,500

2016 - $12,500
2015 - $12,500

IRA:

2017 - $5,500

2016 - $5,500
2015 - $5,500

Catch-up Contributions


401(k) and 403(b) plans:

2017 - $6,000
2016 - $6,000
2015 - $6,000

SIMPLE Plans:

2017 - $3,000

2016 - $3,000
2015 - $3,000

IRA:
2017 - $1,000

2016 - $1,000
2015 - $1,000

Highly Compensated Definition:

2017 - $120,000

2016 - $120,000
2015 - $120,000

Key Employee Definition:

Officer:

2017 - $175,000

2016 - $170,000
2015 - $170,000

Social Security Taxable wage base:

2017 - $127,200

2016 - $118,500
2015 - $118,500

Defined Contribution Plans (DC)

In a Defined Contribution (DC) plan, the amount of money that may be contributed to the plan each year is stipulated in the plan document (and the law). The contribution amount always bears some relationship to the compensation of the employee, their age, or some combination of these factors. A classic example would be: A Profit Sharing Contribution of 5% of Compensation . At retirement, the benefit available to the employee is the accumulation of the contributions and the gains or losses to the account. There is no limit to the benefit.


401(k) Plans

The most popular plan type of DC plan, a 401(k) plan, allows employees to plan for the future by contributing towards their own retirement. The employee may elect to make them on a pre- or post-tax basis. Employees who make pre-tax contributions see the tax benefits immediately. This reduces current income, which in turn reduces current tax withholding on paychecks. Post-tax contributions (Roth contributions) defer the tax savings to retirement or at the time the money is actually removed from the plan. The employer may also make matching contributions. This rewards employees who are taking an active role in building up assets for retirement. Employees are encouraged to increase their contributions to receive the maximum match.


Profit Sharing Plans

The hallmark of profit sharing plans is its flexibility in contributions. Each year the employer may elect a contribution from zero up to the maximum allowed by law. The flexibility extends into how the contributions are allocated to each employee in the plan. This flexibility makes them most attractive to employers. Contributions made by employers are treated as a business expense and are therefore deductible. This may be a significant tax advantage. Rather than paying this money to the IRS in taxes, the employer gets to use it to improve their retirement savings.

A DC plan may have both Profit Sharing and 401(k) features.


Defined Benefit Plans (DB - Traditional)

In contrast to defined contribution plans, defined benefit plans promise participants a monthly benefit at the specified retirement age. To achieve this, the law requires the plan sponsor to make a minimum contribution to the plan each year. The Actuarial Valuation prepared by Pencor provides this minimum amount. The participant's benefit is calculated using a specific benefit formula as stipulated in the plan document. These formulas typically factor compensation and years of service, thereby rewarding employees with longer tenure. For example: 

3% x Years of Service x Average Monthly Salary = Monthly Retirement Benefit
A participant with 10 years of service and average monthly salary of $2,500 will receive:
0.03 x 10 x $2,500.00 = $750.00
A retirement benefit of $750 per month.

Another key difference is that defined benefit plans are almost exclusively funded by the employer. As such, the employer bears the investment risk. This caveat must be considered when designing a defined benefit plan as gains/losses offset required employer contributions, as do forfeited balances for terminated employees. Defined benefit plans (including cash balance plans discussed below) are an attractive alternative to defined contribution plans in that it allows participants/owners to increase their benefit substantially more than the $53,000 currently allowed in DC plans – in some cases up to $260,000 in deferred income per year.


Cash Balance Plans

This defined benefit plan closely resembles a defined contribution plan in that the employee's benefit is expressed as a hypothetical account balance rather than a computed, monthly benefit. This balance is comprised of an annual contribution credit, customarily a percentage of compensation, and an interest credit based upon a guaranteed rate or an adjustable index such as the 30 Year Treasury Rate. Thus, at retirement the participant s benefit is equal to the hypothetical account balance, or the sum of all contributions and interest credits. 

The selection of a retirement plan design is a process that requires consideration of the employer's objectives, the employee demographics and the constraints under ERISA. For over 40 years, the consultants at Pencor have been designing successful retirement plans for their clients. Contact us today, and we will show you how to get results with your retirement plan!

General

There are many reasons why employers choose to provide benefits for their employees. Among them is the desire to promote their financial well-being into retirement, which in turn provides immediate benefits to the employer in the form of increased morale and productivity. Additionally, contributions to qualified retirement plans are tax-deductible to the contributor – both employees and employers. There are two broad categories of employee benefit plans: welfare plans, which provide benefits such as vacation, disability income, and health/dental insurance, and pension benefit plans, which provide retirement income. Pencor staff are subject matter experts in pension benefit plans, so naturally, our focus is on these. 


ERISA (Employee Retirement Income Security Act)

In 1963, the Studebaker Corporation closed its manufacturing plant and declared bankruptcy. In addition to its many other financial troubles, Studebaker's pension plan was grossly underfunded. Thus, Studebaker was unable to pay promised benefits to a large share of its employees. This led to government intervention in the form of increased regulation, culminating in the Employment Retirement Income Security Act, passed by Congress and signed into law by President Ford on Labor Day, 1974. It provides comprehensive protection for promised benefits in employer sponsored retirement plans. This protection covers nearly every aspect of retirement plans including, but not limited to, non-discrimination of benefits, minimum funding requirements, vesting, fiduciary responsibilities, and reporting and disclosure requirements. Pencor provides services to assist plan sponsors in meeting their various obligations under this law.


Pension Benefit Plans

ERISA stipulates that an employee pension plan is any plan or other construct established by an employer that provides retirement benefits for age and/or service, disability retirement benefits, and deferral of taxable income until distribution. To mitigate the potential for misuse, ERISA has set forth a complex and fluid set of rules and regulations that must be adhered to in order to maintain favorable tax status. As such, Pencor's retirement plan professionals daily meet the challenges of understanding the complexities between plan qualification and plan administration, keeping current on the changing regulatory environment. Pencor's team pride s themselves on proactively implementing evolving rules and communicating their consequences. 

There are two major categories of employer-sponsored pension benefit plans: Defined contribution plans (which define the contribution each participant has deposited in his or her account) and defined benefit plans (which guarantee the benefit paid to each participant at retirement). What follows is a comparison chart illustrating the differences between the two plan categories, and a brief description of each.

Annual Plan Limits

DEFINED CONTRIBUTION PLANS

  1. Defined contribution amount
  2. The value of the participant account is the value of the participant benefit at retirement
  3. Participant bears the investment risk
  4. Benefits are not guaranteed
  5. Investment results generally have no bearing on employer contributions

DEFINED BENEFIT PLANS

  1. Defined benefit amount
  2. Retirement benefit is promised
  3. PBGC guarantees a portion of the benefit for covered plans
  4. Employer bears the investment risk
  5. Investment results factor into the employer contributions