Why making changes to your employer contributions is important
POSTED BY: Administrator Administrator AT Tuesday, November 30 at 12:00 AMFollowing a dismal financial fourth quarter in 2008, many companies in 2009 elected to forgo funding their qualified plan employer contributions. This includes employer matching contributions, profit sharing contributions and other employer funding arrangements. As a result, many qualified plans consisted solely of employee contributions during the year.
While the financial markets recovered by the end of 2009, many participants' retirement funds may not show signs of recovery. Adjusting your matching contributions may be one way to help your employees recover some lost ground.
Understanding employer contributions
What can plan sponsors do to gain recovery of these lost plan opportunities? If an employer can make contributions, it's often advantageous to do so. Generally, employers can make two types of matching contributions:
1. Discretionary contributions. Your plan document can provide that you may choose to fund a dollar amount at your discretion. Typically, when you make changes to a discretionary contribution, it's customary to give notice to your employees and pass a board or corporate resolution stating what the contribution will be for the year. Your plan document can subject these contributions to a vesting schedule, and fund them on an annual, per pay or some other basis.
Discretionary contributions are relatively easy to suspend. As long as you're not taking away a benefit already earned by the participants, all you need to do is notify them.
2. Mandatory matching contributions. If your plan document has a fixed formula, you'll need to make a plan amendment to forgo the match. Safe harbor plan designs require mandatory matching contributions and also have an option for a mandatory profit sharing contribution. Previously, a sponsor could generally only suspend these contributions mid-year if the plan terminated. But during 2009, the IRS allowed these plans to suspend these contributions if the plans were amended, timely notice was given to employees, participants were allowed to change their deferral elections and the discrimination tests were performed for the plan year.
Increasing employee morale
Matching contributions increase employee morale. Safe harbor contributions allow highly compensated employees to put away the maximum 401(k) contribution. And returning to match funding is advantageous to key executives who wish to defer the maximum. Doing so could help retain these valuable and key personnel during these highly competitive times.
Safe harbor contributions guarantee that the plan passes discrimination testing. And as the plan sponsor, the company can take a tax deduction for such funding. If your company terminated high safe harbor matching contributions, simply adding a discretionary matching contribution at any amount will encourage employees to participate.
Starting a new plan
Some companies may have frozen the plan or terminated it entirely. In cases of termination, the plan participants may have been paid out their account balances so there's no further opportunity to participate in a plan.
If you want to start a new retirement plan, consider employee involvement. Use a poll of employee options and interests to determine if employees will even make pretax deferrals into a plan. Consider your company's cash flow to determine whether to make a matching contribution or not. If key employees or highly compensated employees want to defer the maximum without failing any specific tests, your plan may need a safe harbor matching contribution - especially if employees won't be participating much in the plan.
Changing for the better
Changing your plan contribution rules may be a quick way to help reinvigorate your employees' retirement accounts. Doing so is a great way to retain - and attract - key employees.
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Is an IRA-based plan the way to go? For companies that eliminated their retirement plans altogether and wish to re-establish one, some relatively simple solutions may help. IRA-based plans, for instance, may provide a quick way to offer a retirement plan. Examples include: Employee IRAs. These allow employees to establish either a traditional or Roth IRA with a financial institution. The employee then has a specified amount deducted post-tax from payroll and deposited directly into the IRA. The employer isn't responsible for monitoring contribution limits, maintaining plan documents or making contributions. SEP plans. Simplified Employee Pension (SEP) plans enable companies to make employer-funded contributions into traditional IRAs set up for employees. The IRS provides a basic plan document for employers to complete and keep on record. An attorney can also draft a custom plan document. SIMPLE IRA plans. Under a Savings Incentive Match Plan for Employees (SIMPLE), the employer sponsors a plan that allows both the employee and employer to make contributions to an employee's traditional IRA. The IRS provides a basic plan document for employers to complete and maintain. The employer must have fewer than 100 employees and cannot have any other retirement plan. Of the IRA plans discussed, this has the most complex contribution rules. All types of employers may offer these arrangements. The IRS has made setup of these plans quick and relatively easy. Better yet, none have to comply with qualified plans' strict requirements, such as filing a Form 5500, conducting discrimination testing and properly maintaining plan documents. If you want to quickly establish a retirement plan with minimal costs, an IRA-based plan may be the way to go. |
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