You’ve made the decision to establish a retirement plan for your company. That’s an important first step; but an employer-sponsored retirement plan is only as effective as its design. Therefore, step two is crucial: hire an experienced Third Party Administrator (TPA) who will help ensure the retirement plan is designed properly for your business.
What variables will I need to consider when designing my company’s retirement plan?
There are a number of features you will need to decide on with your TPA when designing your company’s retirement plan. These include but are not limited to: eligibility, entry, automatic enrollment, loans, distributions, vesting, employee contribution types and employer contribution types.
Who contributes to a qualified retirement plan and why?
Defined Contribution plans can be set up for employee contributions and/or employer contributions. Employees contribute to qualified retirement plans because they want to save for retirement, defer taxes and/or capitalize on an employer matching contribution. Employers contribute to qualified retirement plans to help attract and retain key talent and help their employees save for retirement. Employer contributions also qualify for valuable tax deductions and are not subject to Federal Insurance Contribution Act (FICA) taxes or Federal Unemployment Tax Act (FUTA) taxes.
How do employee contributions work?
Employee contributions are made by eligible employees who have elected to contribute a percentage of their compensation on a pre-tax, or, if the plan has a ROTH provision, a post-tax basis. Each pay period, the employee’s elected percentage is deducted from their paycheck and contributed to the plan. The maximum amount that eligible employees can contribute to a qualified retirement plan in 2017 is $18,000. Eligible employees over the age of 50 can make an additional catch-up contribution in the amount of $6,000 for a total contribution of $24,000 in 2017.
How do employer contributions work?
Employer contributions are characterized as either matching or non-elective. A matching contribution is one in which the employer’s contribution is calculated based on the employee’s contribution. Matching contributions can be calculated using a variety of different formulas. For example, an employer might match 50% of employee contributions. In this case, for every dollar an employee contributes, the employer will contribute fifty cents. Comparatively, an employer might match 100% on the first 3% and 50% on the next 2% of employee contributions. In this case, in order for an employee to receive the maximum employer matching contribution, they must contribute 5% of their compensation. The important piece to remember with a matching program is that an employee will only receive an employer contribution if he or she contributes to the plan themselves.
On the other hand, an employer can also choose to make a non-elective contribution. An employer non-elective contribution differs from an employer matching contribution in that employer non-elective contributions are made regardless of whether or not employees choose to contribute to the plan themselves. Non-elective contributions are often calculated based on employee compensation. For example, if the company makes a non-elective contribution equal to 3% of compensation, then an eligible participant who makes $50,000 a year will receive a $1,500 contribution from their employer. Again, with a non-elective contribution, employees are not required to contribute their own money in order to receive the employer contribution.
The overall contribution limit between employee and employer contributions for 2017 is $54,000. Eligible participants over the age of 50 can make an additional $6,000 catch-up contribution.
I want to make an employer contribution. How do I decide between matching and non-elective?
Offering a retirement plan to your employees is a great benefit in and of itself; but when it comes to attracting and retaining key talent, an employer contribution can be extremely effective. If your goal is to get your employees to participate in the plan, you may want to consider a matching contribution. If you’re concerned about passing annual compliance testing, you may want to consider a non-elective contribution. During the plan design process, your TPA will outline the available options and variables to consider when determining your employer contribution type and formula.
As you can see, plan design is paramount in establishing and maintaining an effective retirement plan for your company. Therefore, it is critical to engage an experienced Third Party Administrator who can help you navigate the nuances of the employer-sponsored retirement plan world. If you need assistance in finding a reputable TPA, contact a wealth management firm that has a specific focus on corporate retirement plans and ask for a referral.