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SUMMARY
The baby boomer generation is changing the face of retirement. Many baby boomers are projected to continue working after the age of normal retirement.
Also, life expectancy in the United States has been on the rise and the Social Security Trust is not growing fast enough. Social Security benefit payments are now greater than the taxes paid into the fund and the fund is projected to be completely depleted by 2035. This means employer-provided retirement plans are more vital than ever to employees.
Types of Retirement Plans
This course examines the 2 basic categories of retirement plans: qualified plans and non-qualified plans.
Qualified plans
A qualified retirement plan is an employer-provided plan that enables employees to save for retirement. There are tax advantages to qualified retirement plans since they meet the Internal Revenue Code's requirements. Employer contributions to qualified plans are tax deductible. However, employees don't have to report employer contributions until they receive them. Taxation occurs when employees begin receiving benefits. Although qualified plans are secured, they must adhere to strict rules and regulations.
Qualified plans can provide several benefits to you and your organization. There are 2 basic types of qualified plans: defined contribution plans and defined benefit plans.
Defined contribution plan. A defined contribution plan is an individual retirement account that lets employees contribute some of their compensation (not exceeding a certain amount) on a tax-deferred basis. Defined contribution plans include profit sharing, Employee Stock Ownership Plans (ESOP), SEP plans, 403(b) plans, and 401(k) plans.
Defined benefit plan. A defined benefit plan is a lifelong benefit that's available to employees when they retire (or slightly before retirement). Defined benefit plans don't usually track individual employee accounts. Employers make contributions to defined benefit plans to pay for the retirement benefits their employees earn. Employee benefits are a combination of employer contributions and income from investing plan assets.
Americans with defined benefit plans are covered by Pension Benefit Guarantee Corporation (PBGC) plan insurance. Although there is a limit to what PBGC will pay, most people do get their retirement benefit in full.
Non-qualified plans
Primarily offered to high-level executives, non-qualified plans enable you to give your top employees a replacement income upon retirement. The replacement income is directly related to the compensation packages of your top employees.
Non-qualified plans are not tax-deductible. They're called "non-qualified" because the IRS doesn't officially recognize them. They're unsecured and risky. However, they are not generally subject to the requirements of the Employee Retirement Income Security Act of 1974 (ERISA). And, you don't have to deal with limitations on benefit or contribution amounts.
Non-qualified plans include rabbi trusts, secular trusts, supplemental executive retirement plans (SERPs), annuities, and cash balance/pension equity plans.
Other Options
Employee Stock Option Plans are not as common as they used to be. Restricted Stock and Restricted Stock Unit plans are growing in popularity because they are less risky for employees than stock option plans.
Your organization could also consider a phased retirement plan, where employees reduce their working hours slowly as they move into retirement.
If you work for a small business, you might want to install a traditional IRA plan, a SEP plan, or a SIMPLE IRA plan.
Plan Administration
You can currently choose from a wide range of benefit plans. The choice can be overwhelming, but your retirement benefit package selection ultimately boils down to two things: company business goals and values.
Ask yourself: What do you want your retirement plan to do? Then after installing a plan, constantly evaluate its competitiveness and effectiveness. Your goal is to increase employee satisfaction.