Defined contribution plans.For employers who offer retirement plans, the most common type of plan offered today is the defined contribution plan Defined contribution plan A pension plan whose sponsor is responsible only for making specified contributions into the plan on behalf of qualifying participants. Related: Defined benefit plan . As defined benefit pension plans vanish, millions of employees must turn to making investment and savings choices to fund their retirement. But others save too little, invest too conservatively or don't don't 1. Contraction of do not. 2. Nonstandard Contraction of does not. n. A statement of what should not be done: a list of the dos and don'ts. participate at all. A recent retirement confidence survey by the Employee Benefit Research Institute found that Americans as a whole aren't aren't Contraction of are not. See Usage Note at ain't. aren't are not aren't be putting money into savings or investments, yet the survey also found that half of those employees expect to rely on their savings from 401(k) accounts or other investments. [ILLUSTRATION OMITTED] [GRAPHIC OMITTED] Surveyed retirees, on the other hand, still cite guaranteed sources--Social Security payments or pension plans--as their primary sources of income. Perhaps that's because most employees who were part of the 401(k) boom haven't have·n't Contraction of have not. haven't have not haven't have reached retirement. Data from the EBRI EBRI Employee Benefit Research Institute EBRI Eccma Business Reporting Identifier EBRI Exclusive Buyers Realty Inc. (San Antonio, TX) show the number of active participants in private-sector 401(k)-type plans increased by 34.1 million between 1985 and 2004. [GRAPHIC OMITTED] The government also allows other types of tax-deferred tax-de·ferred adj. 1. Of or relating to an investment that is not liable to taxation until income is withdrawn or an appointed date is reached. 2. retirement programs, such as plans for the self-employed self-em·ployed adj. Earning one's livelihood directly from one's own trade or business rather than as an employee of another. self and Individual Retirement Accounts (IRAs). Many of the plans are named for sections of the tax code that establish these plans. Among the differences in defined contribution plans are participation rules, contribution limits, the types of available investments, and tax consequences and penalties for early withdrawals. 401(k) Plans WHAT IT IS: An account that allows employees to save for their own retirement through tax-deferred funds. The plan is set up through the employer. WHAT IT INCLUDES: The 401(k) contribution is automatically deducted de·duct v. de·duct·ed, de·duct·ing, de·ducts v.tr. 1. To take away (a quantity) from another; subtract. 2. To derive by deduction; deduce. v.intr. from the employee's paycheck each pay period. This money is taken out, at a percentage determined by the employee, and invested, in a manner chosen by the employee, before the paycheck is taxed. Some employers choose to add to participants' 401(k) contributions through employer matching, profit-sharing profit-sharing Noun a system in which a portion of the net profit of a business is shared among its employees profit-sharing n → participación f de empleados en los beneficios and/or and/or conj. Used to indicate that either or both of the items connected by it are involved. Usage Note: And/or is widely used in legal and business writing. qualified, nonelective contributions Nonelective Contribution A type of contribution an employer chooses to make to each of his or her eligible employee's employer-sponsored retirement plan. The contribution is not based on salary reduction contributions made by the employee. , and the plan provider may supply its own 401(k) plan investment choices. However, the employer may set up eligibility requirements that an employee must meet before receiving contributions. Once the money is deducted from the employee's paycheck, it cannot be withdrawn without a 10% early withdrawal penalty on top of federal, and where applicable, state income taxes. Although funds can be withdrawn for certain financial emergencies, or in some cases, borrowed against investments, the money is intended to stay in the account until the employee is at least 59 1/2. During that time, however, the investment compounds tax-free tax-free adj. Not subject to taxation; tax-exempt. tax-free Adjective not needing to have tax paid on it: a tax-free lump sum Adj. 1. . Money withdrawn at retirement is subject to taxes. The maximum pretax pre·tax adj. Existing before tax deductions: pretax income. pretax adj [profit] → vor (Abzug der) Steuern contribution dollar amount is set by law and adjusted for inflation annually. In 2008, the pretax contribution limit was set at $15,500. Employees age 50 or older may also make an additional contribution of $5,000 per year. When an employee leaves a job, 401(k) investments can be "rolled over" into an Individual Retirement Account (IRA Ira, in the Bible Ira (ī`rə), in the Bible. 1 Chief officer of David. 2, 3 Two of David's guard. IRA, abbreviation IRA. ) or into their new employer's 401(k) plan. By doing this, they avoid paying a penalty or tax. VALUE TO EMPLOYEES * Pretax deductions mean a reduced income tax bill; * Increased investing power: Pretax income pretax income Reported income before the deduction of income taxes. Pretax income is sometimes considered a better measure of a firm's performance than aftertax income because taxes in one period may be influenced by activities in earlier periods. amounts are higher than post-tax amounts; and * Annual contribution levels higher than that of IRAs or annuities. 401(k) accounts also can feature loan options, while IRAs and annuities do not. [GRAPHIC OMITTED] VALUE TO EMPLOYERS * Employers' contributions and administrative expenses associated with the plan are tax deductible That which may be taken away or subtracted. In taxation, an item that may be subtracted from gross income or adjusted gross income in determining taxable income (e.g., interest expenses, charitable contributions, certain taxes). ; * Employers can determine their contributions made to the plan and may change them at any time; and * If employment is terminated before the employee is 100% vested--or achieving full ownership of the employer's contributions--the nonvested contributions can be used by the employer to offset future employer contributions. DID YOU KNOW? In the late 1970s, as a partner at a benefits consulting firm Noun 1. consulting firm - a firm of experts providing professional advice to an organization for a fee consulting company business firm, firm, house - the members of a business organization that owns or operates one or more establishments; "he worked for a , Ted Benna noticed a loophole An omission or Ambiguity in a legal document that allows the intent of the document to be evaded. Loopholes come into being through the passage of statutes, the enactment of regulations, the drafting of contracts or the decisions of courts. in the IRS An abbreviation for the Internal Revenue Service, a federal agency charged with the responsibility of administering and enforcing internal revenue laws. rules under Section 401 (k) that allowed employees to put a percentage of their pay into tax-free accounts. Benna's superiors established the 401(k) plan even before the IRS had finished writing the regulations that would govern it, and to the surprise of some, the IRS approved it in 1981. The government, realizing the volume of salary reductions it was unable to tax, made unsuccessful attempts to repeal The Annulment or abrogation of a previously existing statute by the enactment of a later law that revokes the former law. The revocation of the law can either be done through an express repeal 401 (k)s in the mid- mid- pref. Middle: midbrain. 1980s. Today, Benna is often called the father of 401(k).
Savings Accumulate
Changes in average account balances of consistent 401 (k)
holders, 1999-2006.
Age Group Year-End Year-End Year-End Year-End
1999 Balance 2001 Balance 2003 Balance 2006 Balance
20s $3 $7,282 $13,950 $28,248
30s $17,277 $22,382 $33,503 $61,368
40s $50,147 $51,908 $66,490 $108,262
50s $82,059 $81,350 $98,811 $148,927
60s $121,982 $113,375 $127,008 $157,727
All $67,760 $67,258 $81,665 $121,202
Age Group Change
1999-2006
20s 1004%
30s 255%
40s 116%
50s 82%
60s 29%
All 79%
Source: Tabulations from EBRI/ICI Participant-Directed Retirement Plan
Data Collection Project
403(b) Plans WHAT IT IS: This tax-sheltered annuity Tax-sheltered annuity A type of retirement plan under Section 403(b) of the Internal Revenue Code that permits employees of public educational organizations or tax-exempt organizations to make before-tax contributions via a salary reduction agreement to a tax-sheltered retirement plan is available to employees of public school districts and community colleges as well as some nonprofit A corporation or an association that conducts business for the benefit of the general public without shareholders and without a profit motive. Nonprofits are also called not-for-profit corporations. Nonprofit corporations are created according to state law. church and hospital organizations. The chief difference between the 403(b) plan and a 401(k) is eligibility. Participants in 403(b) plans include teachers, school administrators, school personnel, nurses, doctors, professors, researchers, librarians This is a list of people who have practised as a librarian and are well-known, either for their contributions to the library profession or primarily in some other field. and certain ministers. 403(b) plans allow for tax-deferral of salary and tax-deferred growth of assets. WHAT IT INCLUDES: Individual accounts, or investment options, in a 403(b) plan can be of different types. The types are: * Annuity contract Annuity Contract The written agreement between an insurance company and a customer outlining each party's obligations in an annuity coverage agreement. This document will include the specific details of the contract, such as the structure of the annuity (variable or fixed), any : A contract provided through an insurance company; * Custodial account Custodial Account 1. An account created at a bank, brokerage firm or mutual fund company that is managed by an adult for a minor that is under the age of 18 to 21 (depending on state legislation). 2. A retirement account managed for eligible employees by a custodian. : An account invested in mutual funds; and * Retirement income account: An account set up for church employees invested in either annuities or mutual funds. The requirements for establishing the plan depend on whether the employer will be making contributions or if only elective-deferral contributions Elective-Deferral Contribution A contribution arrangement of an employer-sponsored retirement plan under which participants can choose to set aside part of their pre-tax compensation as a contribution to the plan. Also known as "salary-deferral" or "salary-reduction contributions". will be made to the 403(b) plan. The employee cannot set up the 403(b) account--only employers can set up 403(b) accounts. Contribution limits depend on the type of contributions made to the 403(b) account. A general limit of $15,500 in 2008 applies to elective elective non-urgent; at an elected time, e.g. of surgery. elective adjective Referring to that which is planned or undertaken by choice and without urgency, as in elective surgery, see there noun Graduate education noun deferrals, with a $5,000 additional contribution opportunity for employees age 50 or older. Unlike other defined contribution plans, 403(b) rules allow certain employees with 15 or more years of service to contribute up to an additional $3,000 from their salary. Normal distributions from a 403(b) plan can begin at age 59 1/2. A distribution taken before age 59 1/2 may be subject to a 10% penalty. There is a limit on the total contributions (elective deferrals, nonelective contributions and after-tax contributions) that can be made to a person's 403(b) account. The limit on annual additions is the lesser of $46,000, or the amount of taxable wages In payroll, the sum of all earnings for an employee that are eligible for a particular type of tax are considered Taxable Wages with respect to that tax. Each tax is different and has different regulations about limits to the amount of wages that can be considered taxable with and benefits the employee received from the employer that maintained the 403(b) account in his or her most recent year of service. The employee may also "roll over" 403(b) funds into a new employer's 403(b), 401(k), or governmental 457(b) plan if the new employer's plan accepts rollovers, or an IRA. VALUE TO EMPLOYEES * Reduced taxable income Under the federal tax law, gross income reduced by adjustments and allowable deductions. It is the income against which tax rates are applied to compute an individual or entity's tax liability. The essence of taxable income is the accrual of some gain, profit, or benefit to a taxpayer. ; * Payment of taxes is deferred until money is withdrawn; * Loan options; and * Potential for a reduced tax rate during retirement, as the employee at that point may be in a lower tax bracket Tax Bracket The rate at which an individual is taxed due to a particular income level. Notes: Each income class is taxed at a different level. Generally, the more you make the more you are taxed. . VALUE TO EMPLOYERS * Funding costs are shared between employer and employee. In some cases, only employees contribute. DID YOU KNOW? The following types of contributions can be made to 403(b) accounts: * Nonelective contributions: A type of contribution that an employer chooses to make to an eligible employee's employer-sponsored retirement plan. The contribution is not based on any salary-reduction contributions Salary-Reduction Contribution A cash- or deferred-contribution arrangement of an employer-sponsored retirement plan, under which participants can choose to set aside part of their pre-tax compensation as a contribution to the plan. made by the employee. Tax is not paid on these contributions until they are withdrawn from the account. * Elective deferrals: An arrangement where the employee allows the employer to take a pretaxed amount from his or her salary and contribute it directly into the 403(b) account. Tax is not paid on these contributions until they are withdrawn from the account. * After-tax contributions: Contributions to a retirement plan which are subject to federal income tax. Since the money has already been subjected to state and federal taxes, the contributions will not be taxed when the funds are withdrawn. * A combination of any of the three contribution types listed above. 457(b) Plans WHAT IT IS: This employer-sponsored retirement plan primarily is funded by pretax contributions from the employee's salary. Those funds are invested on a tax-deferred basis. There are two main types of 457 plans: governmental and tax-exempt 457(b) plans. WHAT IT INCLUDES: 457(b) plans offered by state and local governmental entities generally operate similar to 401(k) plans, in that they both involve salary-deferral arrangements, but 457 plans are not subject to certain requirements for reporting, disclosure and discrimination testing--checks on whether only highly-compensated and/or key employees are economically benefiting. Participants can include local and state government workers, fire fighters, police personnel and public school employees. [GRAPHIC OMITTED] Plans for tax-exempt organizations (hospitals, charitable organizations This article is about charitable organizations. For other uses of the word charity, see Charity. A charitable organization (also known as a charity) is an organization with charitable purposes only. , unions, among others), or tax-exempt 457(b) plans, are limited to upper management and have different rules for eligibility, vesting Vesting The process by which employees accrue non-forfeitable rights over employer contributions that are made to the employee's qualified retirement plan account. Notes: , and distributions. Another type of plan, the 457(f), is generally offered only to very senior management at tax-exempt organizations. Through a written agreement, such as an employment contract, the employer pays out eligible executive benefits when the executive retires, dies or is disabled. The agreement contains certain conditions that executives must meet before benefits are paid to them. There is no limit on the amount of money that can be deferred on behalf of qualifying executives. Limits on the other 457(b) plans in 2008 is the lesser of $15,500 or 100% of an employee's salary, and catch-up provisions for employees 50 or older are another $5,000. Governmental 457(b) plans also have a special catch-up contribution opportunity, called the "final three year" provision. This provision permits up to 200% of the elective deferral deferral - Waiting for quiet on the Ethernet. limit, or $31,000 in 2008, and can be used during the three years prior to retirement age as defined in the plan. Despite pretax contributions, 457(b) plans do not impose a penalty on early withdrawals, and can be rolled over into another 457(b) plan. A governmental 457(b) account can be rolled into other retirement plans such as an IRA or a 401(k), but employees with private 457(b) plans can only move them into another tax-exempt organization's 457(b) plan. VALUE TO EMPLOYEES * Reduced taxable income; * Contributions and earnings grow tax-deferred; and * No penalty for early withdrawal. VALUE TO EMPLOYERS * No employer matching programs, although the employer may contribute. Roth 401(k) / Roth 403(b) Plans WHAT IT IS: In traditional 401(k) or 403(b) accounts, contributions are made with pretax dollars, and distributions are taxable. Roth 401(k) and 403(b) plans are opposite: contributions are made with after-tax dollars, and distributions are not taxed. WHAT IT INCLUDES: Like the traditional accounts, the contributions are made through payroll deductions. But since the contributions are after-tax, they do not reduce the taxable income. Limits, however, are the same (up to $15,500 for 2008; $20,500 for employees over 50). Distributions can begin at age 59 1/2 without penalty, and required minimum distributions begin at 70 1/2 (unless the money is rolled into a Roth IRA Roth IRA An individual retirement plan that bears many similarities to the Traditional IRA. Contributions are never deductible, and qualified distributions are tax-free. A qualified distribution is one that is taken at least five years after the taxpayer established his/her first , which can be passed to heirs). An advantage to making after-tax contributions is knowing what the tax risk is. Income-tax rates in 20, 30 or more years could possibly be higher, so a Roth 401(k) or 403(b) plan would protect the participant from that liability. Nonelective or matching employer contributions may not be included in a Roth 401(k) or 40g(b) plan, so they are funneled instead into a traditional account. That money is taxed upon withdrawal. The participant may also split his or her contributions between traditional and Roth accounts, but the contribution limit cannot be doubled despite having two accounts in effect. The money also cannot be moved between the different 401(k) and 403(b) types. Contributions to the Roth plans are irrevocable Unable to cancel or recall; that which is unalterable or irreversible. IRREVOCABLE. That which cannot be revoked. 2. A will may at all times be revoked by the same person who made it, he having a disposing mind; but the moment the testator is : Once the money goes into the account, the employee may not later decide to move the funds into a regular tax-deferred account. The Pension Protection Act of 2006 made the Roth 401(k) and 403(b) permanent, removing the 2010 expiration date Expiration Date The day on which an options or futures contract is no longer valid and, therefore, ceases to exist. Notes: The expiration date for all listed stock options in the U.S. that previously was in force. Employers, however, are not required to offer the Roth 401(k). VALUE TO EMPLOYEES Roth contributions may be withdrawn tax- and penalty-free. This can result in savings for an employee who expects to be in a higher tax bracket in retirement. VALUE TO EMPLOYERS * The ability to offer to employees an opportunity to add to retirement savings, because income caps, which apply to the Roth IRA, do not exist for the Roth 401(k) or Roth 403(b). DID YOU KNOW? The creation of the Roth IRA (Individual Retirement Account) in the late 1990s is probably the best-known achievement of William V William V may refer to:
Delaware (dĕl`əwâr, –wər), one of the Middle Atlantic states of the United States, the country's second smallest state (after Rhode Island). for 34 years in the Senate and House. The 401(k)/403(b) concept was passed in 2001, and became effective in 2006. Roth died in late 2003.
Side By Side: Retirement Accounts Compared
Feature 401 (k) 403(b)
Eligibility Employees who Employees of
perform services 501(c)(3)
for employer organizations,
including teachers,
school admin-
istrators, school
personnel, nurses,
doctors, professors,
researchers,
librarians and
ministers
Contribution $15,500 $15,500
limits:
Individual
Catch-up $5,000 * $5,000
contribution * $3,000 for certain
(over-50 long-term employ-
workers) ees (15 years)
Rollovers Yes (another 401(k), Yes (another 403(b),
403(b), govern- 401(k), govern-
mental 457(b), mental 457(b),
IRA) IRA)
Distributions No tax penalty; No tax penalty;
(age 59.5 Federal, state Federal, state
to 70.5) (where applicable) (where applicable)
taxes apply taxes apply
Loans Yes Yes
Governmental Tax-exempt
Feature 457(b) 457(b)
Eligibility Local, state Highly compensated
government employees within a
employees, tax-exempt
including organization that is
firefighters, police nongovernmental
personnel and (including hospitals,
public school charitable org-
employees anizations and
unions)
Contribution $15,500 $15,500
limits:
Individual
Catch-up * $5,000 * $95,000
contribution * Three years prior * Three years prior
(over-50 to retirement age; to retirement age;
workers) up to $31,000 up to $31,000
in 2008 in 2008
Rollovers Yes (another Yes (Other tax-
governmental exempt 457(b) plans
457(b), 401(k), only)
403(b), IRA)
Distributions * No tax penalty; No tax penalty;
(age 59.5 Federal, state Federal, state
to 70.5) (where applicable) (where applicable)
taxes apply taxes apply
* No penalty for
early withdrawl
Loans Yes No
Feature Roth 401 (k) Roth 403(b)
Eligibility Employees who Employees of
perform services 501(c)(3)
for employer organizations,
including teachers,
school admin-
istrators, school
personnel, nurses,
doctors, professors,
researchers,
librarians and
ministers
Contribution $15,500 $15,500
limits:
Individual
Catch-up $5,000 * $5,000
contribution * $3,000 for certain
(over-50 long-term employ-
workers) ees (15 years)
Rollovers Yes (another Roth Yes (another Roth
401(k), Roth 403(b), 403(b), Roth 401(k),
Roth IRA) Roth IRA)
Distributions * No tax penalty; * No tax penalty;
(age 59.5 Federal, state Federal, state
to 70.5) (where applicable) (where applicable)
taxes apply taxes apply
* Employer * Employer
contributions contributions
subject to Federal, subject to Federal,
state (where state (where
applicable) taxes applicable) taxes
apply apply
Loans Yes Yes
Small Business Retirement Plans Keogh Plans A retirement account that allows workers who are self-employed to set aside a percentage of their net earnings for retirement income. Also known as H.R. 10 plans, Keogh plans provide workers who are self-employed with savings opportunities that are similar to those under WHAT IT IS: Established by the Self-Employed Individuals Tax Retirement Act of 1962, or Keogh Act, these retirement plans may be set up by self-employed persons Noun 1. self-employed person - a writer or artist who sells services to different employers without a long-term contract with any of them free lance, free-lance, freelance, freelancer, independent , partnerships or owners of unincorporated Adj. 1. unincorporated - not organized and maintained as a legal corporation unorganised, unorganized - not having or belonging to a structured whole; "unorganized territories lack a formal government" businesses, as either a defined benefit or defined contribution plan. WHAT IT INCLUDES: A defined benefit Keogh plan is similar to a traditional pension plan. In this plan, 100% of the contributions are made by the employer to themselves and to eligible employees. The employer chooses the specific amount to be received from the fund at retirement. The contribution needed to reach this amount is made by the employer and based on a complex actuarial ac·tu·ar·y n. pl. ac·tu·ar·ies A statistician who computes insurance risks and premiums. [Latin formula. Some of the factors involved in this formula are age, life expectancy Life Expectancy 1. The age until which a person is expected to live. 2. The remaining number of years an individual is expected to live, based on IRS issued life expectancy tables. , estimated retirement benefit amount and years until retirement. These and other factors determine the amount that can be contributed each year into a defined benefit plan Defined benefit plan A pension plan obliging the sponsor to make specified dollar payments to qualifying employees at retirement. The pension obligations are effectively the debt obligation of the plan sponsor. Related: Defined contribution plan . In the defined contribution Keogh plan, the value at retirement depends on the amount of annual contributions and the growth rate of investments. For 2008, the maximum employer and employee total contribution is $46,000. There are two types of defined contribution Keogh plans: money-purchase and profit-sharing plans Profit-Sharing Plan A plan that gives employees a share in the profits of the company. Each employee receives into an account, a percentage of those profits based on their earnings. Also known as "deferred profit-sharing plan" or "DPSP". . [GRAPHIC OMITTED] A Keogh plan is for one business at a time. If the participant has more than one business, then a Keogh plan must be set up for each of them. The participant can also set up a Keogh plan even if he or she is employed elsewhere and runs a business on the side. Like other retirement plans, money cannot be withdrawn before the age of 59 1/2 without a 10% penalty, and distributions are required to begin at the age of 70 1/2. Keogh plans allow for tax-free rollovers into IRAs or other qualified retirement plans, but do not have a loan option. [ILLUSTRATION OMITTED] VALUE TO EMPLOYEES/EMPLOYERS: * Contributions deducted from gross income, reducing taxable salary; * High maximum contribution limits; * Contributions and earnings grow tax-deferred; and * Certain lump sum Lump sum A large one-time payment of money. benefits which are eligible for 10-year averaging--a method of calculating income tax on a lump-sum distribution Lump-Sum Distribution A one time payment for the entire amount due, rather than breaking payments into smaller installments. Some lump-sum distributions receive special tax treatment. from a qualified benefit plan that reduces a beneficiary's tax liability on the distribution. It is available only to a participant who was 50 years of age or older before Jan. 1, 1986, and had been a participant in the plan for at least five years before the year of distribution. DID YOU KNOW? Prior to the Economic Growth and Tax Relief Reconciliation Act of 2001, which increased the deduction deduction, in logic, form of inference such that the conclusion must be true if the premises are true. For example, if we know that all men have two legs and that John is a man, it is then logical to deduce that John has two legs. limit for profit-sharing plans to 25% of compensation, profit-sharing plans had a 10% smaller deduction limit than the money-purchase plans. That favored the use of money-purchase plans (which despite required contributions every year, allowed a 25% deduction limit). Given that tax act, there no longer is a benefit to using one plan over the other. Simplified Employee Pension (SEP 1. SEP - Someone Else's Problem. 2. (tool) SEP - A SASD tool from IDE. ) Plans WHAT IT IS: An SEP, or SEP-IRA SEP-IRA Simplified Employee Plan - Individual Retirement Account , is a retirement arrangement where an employer contributes money to an eligible employee's Individual Retirement Account (IRA). It is designed for self-employed persons, partnerships, sole proprietors, independent contractors A person who contracts to do work for another person according to his or her own processes and methods; the contractor is not subject to another's control except for what is specified in a mutually binding agreement for a specific job. and owner-employees of an unincorporated trade or business. WHAT IT INCLUDES: Despite the types of participant the plan is designed for, it may be set up by any type of business. An employer who establishes a SEP may only have another qualified retirement plan in effect under certain conditions. Under a SEP, the employer can make contributions to his or her own and each employees' plans of up to the lesser of 25% of compensation or $46,000 to an IRA in 2008. These contributions are owned in their entirety The whole, in contradistinction to a moiety or part only. When land is conveyed to Husband and Wife, they do not take by moieties, but both are seised of the entirety. by the employee, and they may be withdrawn and/or transferred by the employee at any time. Because the accounts are IRAs, the amounts therein are subject to all IRA rules regarding transfer, withdrawal and taxation. Generally, catch-up contributions cannot be made, since SEPs are funded by employer contributions only. But a contribution by employees age 50 and older can be made to the IRAs that hold the SEP contributions if the agreement with the financial institution allow for it. In that event, the amount in 2008 is $1,000. There is an investment minimum, of $2,000 per fund, and a custodial fee custodial fee The fee charged by a financial institution that holds securities in safekeeping for an investor. of $15 per year if the IRA balance is less than $10,000. VALUE TO EMPLOYEES/EMPLOYERS: * Contributions are tax deductible by the company--up to 25% of the compensation paid to each plan participant; * Earnings can compound on a tax deferred basis; and * Employer determines the amount, if any, to be contributed each year. Savings Incentive Match Plan for Employees (SIMPLE) WHAT IT IS: A SIMPLE may be set up by employers who do not have another retirement plan and who have 100 or fewer employees with at least $5,000 in compensation for the previous year. WHAT IT INCLUDES: Under a SIMPLE, the employer makes contributions to traditional Individual Retirement Accounts (IRAs), or SIMPLE IRAs Simple IRA A salary deduction plan for retirement benefits provided by some small companies with no more than 100 employees. , for the eligible employee. The employee may also make a tax-deferred contribution. The employee's contribution limit in 2008 is $10,500, and if he or she is over the age 50, a catch-up contribution of $2,500 is also allowed. If the employer chooses to contribute a dollar-for-dollar match of 3% of the employee's pay, then it only need contribute to employees that have elected to make contributions. However, if the employer opts to make a 2% contribution, then it is required to give that to each employee, regardless of whether the employee contributes or not. Distributions are taxed like those from an IRA. Withdrawals prior to age 59 1/2 are subject to the 10% early withdrawal penalty. Unlike an IRA or SEP, however, employees who withdraw money within two years of their first participation in the plan will be assessed a 25% penalty. VALUE TO EMPLOYEES/EMPLOYERS: * Employees may make a tax deduction Tax deduction An expense that a taxpayer is allowed to deduct from taxable income. tax deduction See deduction. on their contributions, while the employer may make a tax deduction on the matching amount. If the employer and employee are one and the same, both deductions apply; and * Contributions are made on a pretax basis and will accumulate Accumulate Broker/analyst recommendation that could mean slightly different things depending on the broker/analyst. In general, it means to increase the number of shares of a particular security over the near term, but not to liquidate other parts of the portfolio to buy a security tax-deferred. DID YOU KNOW? Established by the Small Business Protection Act of 1996, the SIMPLE plans are the replacement for the SARSEP See Salary Reduction Simplified Employee Pension Plan. (Salary Reduction Simplified Employee Pension Plan Salary Reduction Simplified Employee Pension Plan (SARSEP) A low-cost, no-frills version of a 401(k) employee savings plan available to companies with 25 or fewer employees. It allows employees to make pretax contributions to their IRAs through salary reduction each year. ). As of Jan. 1, 1997, no new SARSEPs may be established; however, those in existence as of Dec. 31, 1996, may continue to operate.
Side By Side: Small Business Plans Compared
SEP
Feature Keogh (Simplified Employee Pension)
Eligibility * Self-employed Employees must be at least 21
individuals, years old, has performed
business owners, or service far the company
individuals who earn in at least 3 of the last
any self-employed 5 years and has received
income. at least $450 in compensation
* Participants must during the year.
be 21 years old and
must perform a ser-
vice for the company.
Contribution $46,000 for defined * Employer-only contributions:
Limits contribution plan; no the lesser of 25% of the
specific ceiling for employee's compensation
defined benefit plan or $46,000.
* Employer is not required
to make contributions every
year.
Catch-up None * Generally none
contribution * Certain agreements allow
(over-50 for a $1,000 contribution
workers) by employee into IRA.
Rollovers Yes (another Keogh, Yes (another SEP, SEP or
SEP or IRA) Keogh)
Distributions No tax penalty; No tax penalty; Federal, state
(age 59 1/2 Federal, state (where applicable) taxes apply
to 70 1/2) (where applicable)
taxes apply
Loans N
SIMPLE (Savings Incentive Match
Feature Plan for Employees)
Eligibility * Employer has no more than 100
employees (Including self-employed
individuals), each who earned $5,000 or
more in compensation during that year.
* Employer does not maintain another
qualified retirement plan, 403(b), or
SEP at the same time.
Contribution *$10,500
Limits * Mandatory employer contributions,
either:
1. Dollar-for-dollar matching
contribution on the first 3% of
compensation that the individual
elects to defer; or
2. A nonelective contribution of 2%
of each employee's compensation.
Catch-up $2,500
contribution
(over-50
workers)
Rollovers Yes (Tax-free rollover to another
SIMPLE plan may be made in 2-year
period starting on day the first
employer contribution was made.)
Distributions * No tax penalty; Federal, state
(age 59 1/2 (where applicable) taxes apply
to 70 1/2) * Early withdrawal penalty in
SIMPLE's first two years is 25%.
Loans No
Other Defined Contribution Plan Options Defined contribution plans can take many forms. Here is a look at some other plans utilized in the workplace: * Profit-Sharing Plan: The employer makes contributions that may be based on a fixed formula related to profits, compensation or other factors. These factors are not required for contributions, and the company is not under obligation to make contributions on a regular basis. * Thrift Plan Thrift plan A defined contribution plan in which an employee contributes, usually on a before-tax basis, toward the ultimate benefits that will be provided. The employer usually agrees to match all or a portion of the employee's contributions. (also Savings Plan): An account where an employee makes after-tax contributions that are usually matched, in whole or in part, by employer contributions. * Employee Stock Ownership Plan (ESOP ESOP See: Employee Stock Ownership Plan ESOP See Employee Stock Ownership Plan (ESOP). ): The employer contributes its stock--or cash to buy existing shares--to the plan for the benefit of its employees. Contributions in the fund can grow tax-deferred, but must be invested in the company's stock. * Money-Purchase Pension Plan Money-Purchase Pension Plan A defined-contribution plan to which employer contributions are fixed. Notes: Employers may contribute up to 25% of employees' compensation to a money purchase pension plan. See also: Defined Benefit, Defined Contribution, Pension Plan : Mandatory employer contributions, usually stated as a percentage of the employee's salary, are placed into an account. Benefits are equal to the amount in the account at the time of the employee's retirement. Defined Benefit Plans WHAT IT IS: With a defined benefit plan--known primarily as a pension or traditional plan--the employee is promised a specified monthly benefit at retirement. WHAT IT INCLUDES: These plans may use a specific formula to determine final benefits: * Flat-benefit formula: An exact dollar amount. The employee is paid a flat dollar amount for each year of service recognized under the plan. These formulas are most common in collectively bargained plans or plans covering hourly paid employees. * Career-average formula: This benefit amount is based on a percentage of the employee's pay each year he or she is in the plan, or a percentage of career-average pay multiplied mul·ti·ply 1 v. mul·ti·plied, mul·ti·ply·ing, mul·ti·plies v.tr. 1. To increase the amount, number, or degree of. 2. Mathematics To perform multiplication on. by the number of years of service. * Final-pay formula: A formula that pays a benefit amount based on your average earnings over a specified number of years--typically five--of service at the end of an employee's career. These benefit amounts are usually higher than if calculated with a career-average formula because these years tend to be the employee's highest-earning years. Career-average and final-pay formulas are most common in plans covering nonunion nonunion /non·union/ (non-un´yun) failure of the ends of a fractured bone to unite. non·un·ion n. The failure of a fractured bone to heal normally. employees. [GRAPHICS OMITTED] If the employer's plan is in compliance with rules set by ERISA See Employee Retirement Income Security Act. ERISA See Employee Retirement Income Security Act (ERISA). (Employee Retirement Income Security Act The Employee Retirement Income Security Act of 1974 (ERISA), 29 U.S.C.A. § 1001 et seq. (1974), is a federal law that sets minimum standards for most voluntarily established Pension and health plans in private industry to provide protection for individuals enrolled in these plans. of 1974), then a contribution to a qualified plan is immediately deductible in computing computing - computer the employer's taxes. However, it only becomes taxable to the employee when he or she receives a distribution. Plans not meeting ERISA requirements may also be used to provide retirement income, but are generally governed gov·ern v. gov·erned, gov·ern·ing, gov·erns v.tr. 1. To make and administer the public policy and affairs of; exercise sovereign authority in. 2. by trust law rather than the tax code. Providers of these nonprivate plans include government agencies, public schools and churches. VALUE TO EMPLOYEES * The benefit is predictable, and not dependent on asset returns; * Employers' contributions are generally higher; and * Employees can have other retirement plans. VALUE TO EMPLOYERS * Employers can deduct de·duct v. de·duct·ed, de·duct·ing, de·ducts v.tr. 1. To take away (a quantity) from another; subtract. 2. To derive by deduction; deduce. v.intr. more compared with other types of plans; * A way to reward older and longer-serving employees; and * Benefit is paid only to employees who are vested vested adj. referring to having an absolute right or title, when previously the holder of the right or title only had an expectation. Examples: after 20 years of employment Larry Loyal's pension rights are now vested. (See: vest, vested remainder) . Generally, most private plans consider employees vested after five years of service. Hybrid Retirement Plans In recent years, the Years, The the seven decades of Eleanor Pargiter’s life. [Br. Lit.: Benét, 1109] See : Time number of employers providing a defined benefit plan--the most expensive and complex--has dramatically decreased. Some companies looking to reduce costs have frozen pension benefits, but others have found that a hybrid plan offers a compromise between the traditional defined benefit and contribution plans. * Cash-Balance Plan: The employer still funds the payments, but rather than a guaranteed pension for life, a cash-balance plan provides employees with a lump-sum amount. The participant's account accumulates through annual pay credits--usually a percentage of annual compensation--and annual interest. The rate is generally linked to a market index, such as one-year Treasury bills. The plans also provide an annuity annuity: see insurance. annuity Payment made at a fixed interval. A common example is the payment received by retirees from their pension plan. There are two main classes of annuities: annuities certain and contingent annuities. option, and the employer's annuity may offer higher annual payments at a lower cost than one purchased on the open market. * Pension Equity Plan: These plans are based on a final-average earnings. The employee is credited with points based on age, service or a combination. The benefit--which may be converted to an annuity--is a lump sum determined by the employee's final-average compensation multiplied by the accumulated ac·cu·mu·late v. ac·cu·mu·lat·ed, ac·cu·mu·lat·ing, ac·cu·mu·lates v.tr. To gather or pile up; amass. See Synonyms at gather. v.intr. To mount up; increase. points. * New Comparability Plan: These plans are generally used by businesses that want to maximize contributions to owners and higher paid employees. Employees can be split into groups based on traits such as job classification or ownership amounts, and a contribution rate for each is set. * Age-Weighted Profit Sharing profit sharing, arrangement by which employees receive, in addition to their wages, a share of the net profits of a business. The purpose is to give them an incentive to increase their output through enhanced morale, less wasteful use of materials, better care of Plan: Unlike the profit-sharing plan, the total contribution to an age-weighted plan is allocated based on employee's age and compensation. Allocations are weighted in favor of upon the side of; favorable to; for the advantage of. See also: favor those employees closer to retirement, benefiting employees who are older. * Floor-Offset Plan: An employer maintains both a defined contribution and defined benefit plan. The employee receives the benefit accrued ac·crue v. ac·crued, ac·cru·ing, ac·crues v.intr. 1. To come to one as a gain, addition, or increment: interest accruing in my savings account. 2. under the defined contribution plan unless it is lower than a minimum benefit set by the defined benefit floor. In that case, the floor plan makes up the difference so the employee can still reach the minimum amount. * Target Benefit Plan: Annual contributions are determined by the amount needed to accumulate a fund sufficient to pay a retirement benefit--projected by the employer. Contributions are allocated to accounts for each participant. The actual earnings on the accounts may differ from the estimated earnings--and gains or losses affect the benefits payable to the participants.
It Matters When You Save
Assuming a 10% rate of return, and beginning-of-year
investments, a $2,000-a-year investment--or $39 a
week--for 20 years will return $126,003.
Present-Year End-of-Year
Age Invest Earnings Asset
25 $2,000 $200 $2,200
30 $2,000 $1,543 $16,974
35 $2,000 $3,706 $40,767
40 $2,000 $7,190 $79,087
44 $2,000 $11,455 $126,003
In this example, the investments are stopped at age 45 to show how the
$126,003 grows over the next 21 years.
Present-Year End-of-Year
Age Invest Earnings Asset
45 0 $12,600 $138,603
50 0 $20,293 $223,221
55 0 $32,682 $359,500
60 0 $52,635 $578,980
65 0 $84,769 $932,454
So if saving begins at age 45, the amount amassed at age
65 would be $126,003. But an individual who started
saving at 25 years old would have over $900,000 at age
65. Following this model through to age 66, savings
would eclipse $1 million. As wages presumably increase,
the $39 weekly commitment could become easier.
Social Security WHAT IT IS: A publicly financed system established in 1935 that provides financial protection for working Americans and their families when earnings are lost due to retirement, disability or death. The system is funded by a payroll tax Payroll Tax Tax an employer withholds and/or pays on behalf of their employees based on the wage or salary of the employee. In most countries, including the U.S., both state and federal authorities collect some form of payroll tax. . The employee and the employer each pay 6.2% of wages into the system up to the taxable maximum ($102,000 in 2008), while the self-employed pay 12.4%. As more baby boomers See generation X. enter retirement, an added strain will hit the Social Security system, and by some projections, the fund's reserves will be depleted de·plete tr.v. de·plet·ed, de·plet·ing, de·pletes To decrease the fullness of; use up or empty out. [Latin d by 2041. In 2017, Social Security is scheduled to start paying out more in benefits than it collects each year in payroll taxes. WHAT IT INCLUDES: To receive monthly checks, the employee must have worked a certain length of time in a job covered by Social Security (about 10 years). The earliest an employee can receive benefits is age 62, but since that is before full retirement age, payments will be reduced. The age for receiving full benefits is increasing. If the worker is born after 1937, Social Security benefits are no longer considered full at age 65. A worker born in 1938 is considered full retirement age at 65 and 2 months. The schedule will then add another two months for each year after that until 2027, when workers born in 1960 and later will have to be 67 years old to qualify for full benefits. Eligibility for reduced benefits at age 62 won't change. A spouse spouse A legal marriage partner as defined by state law entitled en·ti·tle tr.v. en·ti·tled, en·ti·tling, en·ti·tles 1. To give a name or title to. 2. To furnish with a right or claim to something: to benefits receives whichever is larger: his or her own entitlement An individual's right to receive a value or benefit provided by law. Commonly recognized entitlements are benefits, such as those provided by Social Security or Workers' Compensation. , or an amount equal to half of the spouse's. Social Security benefits are entirely tax-free for most retirees, and are at least partially tax-free for the rest. If the adjusted gross income, plus nontaxable interest on bonds, plus 50% of Social Security benefits exceeds $25,000 for a single worker, or $32,000 for a married couple filing together, then up to 50% of benefits can be taxed. If income is more than $34,000 on a single tax return, or $44,000 on a joint return, then a different formula takes over that almost always requires 85% of your benefits be taxed. Workers who are insured under Social Security and are blind, or disabled in ways that prevent them from working, may receive disability benefits based on their average earnings. Disability is defined as an inability to work because of a physical or mental impairment Impairment 1. A reduction in a company's stated capital. 2. The total capital that is less than the par value of the company's capital stock. Notes: 1. This is usually reduced because of poorly estimated losses or gains. 2. that has lasted or is expected to last at least 12 months or to result in death. DID YOU KNOW? How Social Security benefits are determined: (1) The number of earnings years are determined. For workers born after 1928, the employee's highest 35 years of earnings covered by Social Security are used. Fewer years are used for workers born before 1928. (2) Earnings in these years are adjusted for inflation (called indexing). In 2008, benefits are going up 2.3%--the smallest increase in 4 years (2.1% in 2004). That translates to about an extra $24 a month in the average check. (3) The average monthly earnings, with the adjustment for inflation, during those 35 years in which the worker earned the most, are calculated. For those workers who don't have 35 years, years of $0 are factored into the calculations. (4) A formula is then applied to these earnings to arrive at what is called the "primary insurance amount" (PIA pi·a n. The pia mater. pi  al adj. ). To arrive at
the PIA in 2008, determine these amounts:
a) 90% of the first $711 of the average monthly earning; b) 32% of the amount between $711 and $4,288; and c) 15% of everything over $4,288 (This amount is reduced if benefits are taken before full retirement age is reached.) The sum of these totals is the PIA, or full retirement benefit.
Qualified or Not?
A look at who is entitled to benefits, and when they can be paid out:
Life event Worker Worker's Spouse
Worker retires Age 62 and * Age 62 and over
over * Any age if caring for the worker's
child who is under 16
(or disabled before 22)
Worker becomes Any age * Age 62 and over
disabled before full * Any age if caring for the worker's
retirement child who is under 16
age (or disabled before 22)
Worker dies * N/A * Age 60 and over (50 if disabled)
* Dependent * Any age if caring for the worker's
parents of child who is under 16
worker 62 (or disabled before 22)
and older * Divorced spouses age 60
(50 if disabled) if marriage lasted
10 years or more.
Life event Worker's Unmarried Children
Worker retires * Under 18, or under 19 if in high
school
* Any age if disabled before 22
Worker becomes * Under 18, or under 19 if in high
disabled school
* Any age if disabled before 22
Worker dies * Under 18, or under 19 if in high
school
* Any age if disabled before 22
Medicare Medicare, national health insurance program in the United States for persons aged 65 and over and the disabled. It was established in 1965 with passage of the Social Security Amendments and is now run by the Centers for Medicare and Medicaid Services. WHAT IT IS: A federal program that provides hospital and medical insurance to Social Security recipients. Coverage takes effect for eligible recipients automatically at age 65. Certain disabled persons are eligible before 65. WHAT IT INCLUDES: Beneficiaries can select their health care under different Medicare services. Original Medicare plans When Medicare was created in 1965, it provided just two parts: * Medicare Part A (hospital insurance): Program helps pay, with certain limits, for inpatient inpatient /in·pa·tient/ (in´pa-shent) a patient who comes to a hospital or other health care facility for diagnosis or treatment that requires an overnight stay. in·pa·tient n. hospital care, and inpatient care inpatient care Managed care Services delivered to a Pt who needs physician care for > 24 hrs in a hospital in a skilled nursing facility skilled nursing facility n. Abbr. SNF An establishment that houses chronically ill, usually elderly patients, and provides long-term nursing care, rehabilitation, and other services. , home health care and hospice hospice, program of humane and supportive care for the terminally ill and their families; the term also applies to a professional facility that provides care to dying patients who can no longer be cared for at home. . Most Medicare beneficiaries qualify for premium-free Part A, and it is financed by a 1.45% payroll tax paid by employees and employers. Medicare Part A in 2008 Deductible: $1,024, up from $992 in 2007. Copayments: Daily amount for days 61-90 of hospitalization hospitalization /hos·pi·tal·iza·tion/ (hos?pi-t'l-i-za´shun) 1. the placing of a patient in a hospital for treatment. 2. the term of confinement in a hospital. goes from $248 in 2007 to $256 in 2008. * Daily amount for days 91 and beyond will be $512 a day, an increase of $16 over 2007. * Days 21-100 in a skilled nursing facility is $128, $4 higher than in 2007. * Medicare Part B (medical insurance): Program covers doctors' bills, outpatient outpatient /out·pa·tient/ (-pa-shent) a patient who comes to the hospital, clinic, or dispensary for diagnosis and/or treatment but does not occupy a bed. out·pa·tient n. treatment, ambulance services, and a wide range of other services, including X-rays, some chiropractic chiropractic (kīrəprăk`tĭk) [Gr.,=doing by hand], medical practice based on the theory that all disease results from a disruption of the functions of the nerves. services and equipment and supplies. Monthly premiums to pay for the program are deducted from your Social Security checks. Medicare Part B in 2008 Deductible: $135, $4 more than 2007's deductible Monthly premium: $96.40, up from $93.50 in 2007 Also: Individuals with an annual income of $82,000 and higher, or a married couple with an annual income of $164,000 and higher, will begin to pay a higher monthly premium. Medicare Evolves * Medicare Advantage plans: In 2003, Medicare Part C, called Medicare + Choice when it was created in 1997, was renamed Medicare Advantage for enrollees in Parts A and B. Through Medicare Advantage, insurance companies contract through the government to offer benefits through its policies. The individual can participate in managed-care plans like HMOs. Medicare also offers a variation that works like a PPO PPO abbr. preferred provider organization PPO Managed care Preferred provider organization, see there Infectious disease Pleuropneumonia-like organism, see there , and private fee-for-service-plans and medical savings accounts  This article or section is in need of attention from an expert on the subject.Please help recruit one or [ improve this article] yourself. See the talk page for details. also are available. * Medicare Part D: Approved in 2003, a prescription drug prescription drug Prescription medication Pharmacology An FDA-approved drug which must, by federal law or regulation, be dispensed only pursuant to a prescription–eg, finished dose form and active ingredients subject to the provisos of the Federal Food, Drug, program approved took effect in 2006. Like Part C, Medicare contracts with private companies to offer drug plans. Participation is voluntary, but the individual must be enrolled in Parts A and B, and a monthly premium penalty may be assessed if enrollment is after the first three months of initial eligibility. Plans are allowed to add and remove drugs on their lists as long as they give 60 days notice, while individuals can switch plans once a year during a period which currently runs from Nov. 15 to Dec. 31. Here's how the plan works: Once the premium and deductible is satisfied, then the individual pays 25% of drug costs annually up to $2,510. Then, between $2,510 and $5,726.25, the individual is responsible for 100% of the costs. That area is often referred to as the doughnut hole. After costs exceed $5,726.25, the individual's responsibility drops to 5% (There are minimum copayments, however, of $2.25 for generic prescription drugs, and $5.60 for brand-name prescription drugs.) Medicare Part D in 2008 Monthly Premium: On average, the nearly 1,800 available plans charge a monthly premium of $28--with a range from $9.80 to $107.50, depending on the coverage. Deductible: $275. Medicare Doughnut Hole Deductible $275 Coverage 75% No Coverage $2,510-$5,726.25 Coverage 95% Medicare Supplement Plans WHAT IT IS: Private insurance companies also sell supplement plans--also known as "Medigap Med·i·gap n. Private health insurance designed to supplement the coverage provided under governmental programs such as Medicare. medigap " plans--to help pay some of the health-care costs that the original Medicare plan doesn't cover, such as deductibles and copayments. WHAT IT INCLUDES: In most states, policies are standardized standardized pertaining to data that have been submitted to standardization procedures. standardized morbidity rate see morbidity rate. standardized mortality rate see mortality rate. into plans labeled A through L. Each type offers basic benefits, but has additional benefits that vary by plan. Medicare Supplement plans A to J have one set of basic benefits with higher premiums, and plans K and L have a different set of basic benefits with lower premiums, but higher out-of-pocket costs out-of-pocket costs Managed care Health care costs that a covered person must pay out of pocket–eg, coinsurance, deductibles, etc. See Copayment. . Because of Medicare Part D, Medigap plans H, I and J no longer include prescription drug coverage, unless it was purchased before Jan. 1, 2006. Individuals have six months after turning 65--if enrolled in Part B--to buy Medigap Insurance. After this period, premiums may be higher and denials based on current or past health problems are possible. |
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