If you’re trying to add a retirement program to your benefits package, you’ve probably learned a thing or two about employee retention. This is a big step for small business owners, but it’s important to understand the fundamentals before diving in. Here are some answers to commonly asked questions about ERISA and pensions.
What Is ERISA?
The Employee Retirement Income Security Act (ERISA) protects employees who choose to enroll in employer-sponsored retirement programs. Ultimately, it ensures that all contributions are available to account holders upon retirement. This federal law was enacted in 1974 and covers most pension and retirement plans in the private sector. As an employer, you are required to:
- Inform all participants about the funding and specific features of each plan.
- Establish standards for participation, funding, vesting and accrual.
- Set up a formal process for claims and appeals.
- Establish fiduciary duties for plan managers, and grant each participant the right to sue for any breach in duty.
- Guarantee protection under the Pension Benefit Guaranty Corporation in the event that benefits are canceled.
What’s a Defined Benefit Plan?
This is the traditional pension program and guarantees each employee a set monthly payment after retirement. You fund all plan benefits and designate a fixed dollar amount for monthly distributions. Program administrators use special formulas to determine how much each employee will receive. Common factors include salary level, age and total years worked.
What’s a Defined Contribution Plan?
This is becoming the norm, especially in the small business community. In a defined contribution plan, employees fund their own accounts through regular paycheck deductions. These amounts go in pretaxed, and participants can decide how the funds are invested. As the employer, you may choose to match a certain percentage of what each employee puts in. Your contributions are tax deductible. The final amount that each participant receives upon retiring depends on the success of each investment, how much is vested, what amounts were pretaxed and whether or not the employee took any early withdrawals. The most common types of defined contribution plans are 401(k), SIMPLE IRA, SEP, ESOP and profit sharing.
What Is a Fiduciary?
Every retirement plan must have at least one fiduciary. This is a person or entity charged with managing and controlling a plan’s assets with full discretion. This is usually a corporate board of directors or a committee of trustees and investment advisors. The designation is based on the required functions of a plan rather than an individual’s title. Few practicing accountants and lawyers are actually acting as retirement plan fiduciaries.
Who Can Enroll?
This depends on which plan you choose, but most employer-sponsored programs require a certain length of full-time service before employees can enroll. Ninety-day periods are common. In general, participants must be at least 21 years old.
What Is Vesting?
Vested contributions represent the amount of money that an account holder has legally earned. While these funds are meant to be distributed at retirement, participants can usually withdraw money at any time by paying a penalty fee. All employee contributions are automatically vested.Your contributions, on the other hand, don’t have to vest into retirement accounts right away. Most plans require employees to work at least three years at the same company, but all employer contributions become legally vested after five years of continuous service.
What Happens When an Employee Retires?
Your employees will be eligible to begin receiving retirement benefits after working for a set number of years or when they reach a certain age. Federal law requires all participants to begin taking distributions on April 1 of the year that they turn 70Â½. This date may be earlier depending on your specific program.You’re probably already providing health insurance for your employees, but retirement is a whole new ball game. Whether you’re considering a pension, a 401(k) or profit sharing, talk to a lawyer to determine the best option for your company.
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