Picking the Right Retirement Plan (Part One: Understanding ERISA)

Picking the Right Retirement Plan (Part One: Understanding ERISA)

Megan Dovie, CPA, Manager
Posted by Megan Dovie, CPA, Manager on Jan 3, 2019 2:00:00 PM

StaffMeetGetting the best employees means giving them the best possible benefit packages. One crucial part of that package is a plan that allows your employees to save for retirement, while you help them by matching part of their contributions.

Over the next several weeks, we will offer a series of blogs on the kinds of retirement plans you can offer your employees and the regulations that come with them, beginning with understanding what ERISA is.

What is ERISA? The Employee Retirement Income Security Act of 1974 (ERISA) protects millions of Americans’ assets so that funds they put in retirement plans during their working lives will be there when they retire.

ERISA sets minimum standards for retirement plans in private industry.  Not all plans are covered under ERISA such as churches, plans maintained by governments, and several other types of plans.  For additional information on which plans are excluded please go to the department of labor’s website.  

Most of the provisions of ERISA are effective for plan years beginning on or after January 1, 1975. ERISA does not require you to establish a retirement plan. It only requires that if you do establish a plan, you must meet certain minimum standards. The law generally does not specify how much money a participant must be paid as benefit.

ERISA does the following:

  • Requires plans to provide participants with information about the plan, including literature about plan features and funding. The plan must furnish some information regularly and automatically. Some is available free of charge, some is not.
  • Sets minimum standards for participation, vesting, benefit accrual, and funding.
  • Requires accountability of plan fiduciaries. ERISA generally defines a fiduciary as anyone who exercises discretionary authority or control over a plan's management or assets, including anyone who provides investment advice to the plan. Fiduciaries who do not follow the principles of conduct may be held responsible for restoring losses to the plan.
  • Gives participants the right to sue for benefits and breaches of fiduciary duty.
  • Guarantees payment of certain benefits if a defined plan is terminated, through a federally chartered corporation, known as the Pension Benefit Guaranty Corporation. 

What is a defined contribution plan? A defined contribution plan, on the other hand, does not promise your employees a specific benefit amount at retirement. Instead, you may contribute money to an individual account in the plan. In many cases, employees are responsible for choosing how these contributions are invested and deciding how much to contribute from their paycheck through pretax deductions. Employers may add to the account, in some cases by matching a certain percentage of employee contributions. The value of the account depends on how much is contributed and how well the investments perform. At retirement, the employee receives the balance in your account, reflecting the contributions, investment gains or losses, any fees charged against the account, and employer contribution vesting adjustments (if any needed).

What are 401(k) plans? In this type of defined contribution plan, the employee can make contributions from his or her paycheck before taxes are taken out. The contributions go into a 401(k) account, with the employee often choosing the investments based on options provided under the plan. In some plans, you as the employer also make contributions, matching the employee's contributions up to a certain percentage.

There are four types of 401(k) plans:

  • traditional 401(k)
  • safe harbor 401(k)
  • SIMPLE 401(k)
  • automatic enrollment 401(k) plans.

The SIMPLE IRA plan, SEP, employee stock ownership plan (ESOP), and profit-sharing plan are other examples of defined contribution plans. SIMPLE and safe harbor 401(k) plans have additional employer contribution and vesting requirements.

Coming next: Learn more about who can participate in a 401(K) plan, and what you need to do to set one up for your employees.

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