FERS Retirement Benefits Explained (A quick guide for busy employees)
How to Provide Retirement for Your Employees As a Small Business
As a small business owner, you have several options for creating a retirement solution for your employees. Among the most popular options are various Individual Retirement Arrangements (IRA). Other options include a “defined benefit” plan and “defined contribution” plans.After researching retirement options, you should meet with an accountant and attorney to discuss the impact the retirement plan will have on your business.
Starting an IRA Plan for Your Employees
Identify the different types of IRA plans.There are roughly three different kinds of IRA plans you could set up for your small business. They are very similar to each other but have a few different wrinkles. Each should be easy to administer as the small business owner. The three most common are:
- Payroll deduction IRA.Any employer with more than one employee can set up a payroll deduction IRA. You arrange with the employee to make a payroll deduction and then send the contributions to the IRA. There is no minimum requirement, but maximum contributions per participant are ,500 for 2019 (or ,500 if age 50 or older).
- Simplified Employee Pensions (SEP).This plan differs from the payroll deduction IRA in that you, the employer, make a contribution. The employee does not. You also will decide how much to contribute each year. If you choose the SEP, then you must contribute a uniform percentage of pay for each employee. The maximum you can contribute is ,000 or 25% of pay, whichever is lesser.
- SIMPLE IRA Plans.If you have 100 or fewer employees, you can set up a SIMPLE IRA. The employee can make deductions and employers must match a certain percentage of the employee’s contribution. The maximum an employee can contribute is ,500 in 2019 (with up to an additional ,000 if age 50 or over).
Find a financial institution that administers IRAs.The financial institution you contract with will act as the trustee to your plan. It will generally be responsible for depositing your contributions, issuing annual statements, making investment decisions, and submitting required filings to the IRS.
- You can find institutions by asking other small businesses that have IRA plans if they would recommend their service provider.
- You can also perform an Internet search. Type “small business IRA provider” into your favorite search engine.
Meet for a consultation.You might already know which IRA plan you want. However, you should still talk the options over with the financial professional, who may have advice.
- You should also talk with your tax professionals and attorneys ahead of time to fully understand what consequences adopting a retirement plan will have.
Complete the paperwork.You can typically start an IRA plan by completing a short form with the financial institution who will act as your service provider. You should call ahead of time and ask what information you should bring.
- If you are creating an SEP, then you will need to fill out Form 5305-SEP, which is only two pages.
- Get copies of all completed paperwork for your records.
Give your employees information.After setting up the plan, you need to notify your employees. For example, if you set up an SEP-IRA, then you will give each employee a copy of Form 5305-SEP (or equivalent form) and instructions. You also must provide employees with a written statement, which explains the following:
- Employees who participate will receive a written report of their employer contributions by January 31 of the following year
- The SEP-IRA may provide different rates of return and have other terms than other IRAs the employee has
- The SEP administrator will provide a copy of any amendment within 30 days of the date it is effective
Monitor the trustee.You should always monitor the trustee to make sure that it is fulfilling its duties. You should always review any communication or report from the trustee and raise questions in writing. If an employee raises a question about the plan, be sure to follow up with the financial institution for the employee.
- Also make sure that the administrative fees continue to be reasonable.If fees are increased, ask for an explanation in writing.
Terminate the plan, if necessary.Your business might grow and change. For example, you might have an SEP plan, which is only available if you have 100 or fewer employees. If you grow too large, you might need to switch to a different retirement plan. Contact your financial institution service provider and discuss your options.
- If you decide to terminate, then you should contact the financial institution and tell them that you will not make your next contribution and want to cancel the agreement. You should also notify your employees that the plan will be discontinued.
Creating a Defined Contribution Plan
Identify some basic information about defined contribution plans.Many different plans fall under the umbrella term “defined contribution.” They differ in the amount that employees can contribute to the plan. They differ from “defined benefit” plans in that they do not guarantee any amount of money on retirement:
- Profit sharing.You can make discretionary contributions to a profit sharing plan. However, if you do make a contribution, you must come up with a formula for allocating contributions to different participants in the plan. The maximum contribution is 100% of compensation or ,000 per employee, whichever is less.
- Traditional 401(k).Employees defer a portion of their salary on a pre-tax basis. As the employer, you can choose to match or make another contribution. Employer contributions are usually not taxed until distribution. The employee can contribute a maximum of ,000 in 2019 (and up to an additional ,000 if 50 or older).
- Safe Harbor 401(k).This is an ideal plan if you have highly-compensated employees whose contributions might be limited under a traditional 401(k). Employees contribute a percentage of their salary and the employer is required to contribute. The employee can contribute a maximum of ,000 in 2019 (and up to an additional ,000 if 50 or older).
- Automatic Enrollment 401(k).This plan requires employees to opt out if they do not want to participate. There are also default contribution rates. Automatic Enrollment 401(k) plans are ideal if you want high participation and have highly-compensated employees whose contributions might be limited under a traditional 401(k). The employee can contribute a maximum of ,000 in 2019 (and up to an additional ,000 if 50 or older).
Meet with a financial professional for more information.You can set up a plan yourself. However, you would probably benefit from meeting with a financial institution or finance professional. These people can help you set up the defined benefit plan and answer any questions that you have.
Adopt a written plan document to create a 401(k).This document will describe the day-to-day operations for your plan. If you hire a financial institution or retirement plan professional, then they should provide the plan document for you.
Arrange a trust for the plan’s assets.You cannot just dump your employee’s retirement plan contributions into your savings account. Instead, you need to create a trust. The trust will manage the assets solely for the benefit of the plan’s participants.
- A “trustee” handles the trust’s assets. You should choose this person carefully. If you create the plan through a reputable financial institution, then they should have experience either acting as trustee or hiring one.
Create a record-keeping system.You must keep proper records which track contributions, earnings and losses, as well as plan investments and expenses. An adequate record-keeping system will help you complete required reports that must be filed with the federal government.
- The financial institution you work with should have a record-keeping system in place. Be sure to ask during your consultation what kind of record-keeping they have in place.
Give your employees information about the plan.Finally, you can’t create a 401(k) plan without giving employees required information so that they can decide whether to participate. You should give your employees information about the plan’s benefits, features, and the rights of those who choose to participate.
- You also must give all employees who enroll in the plan a summary plan description. You usually create this with the plan document.
Monitor the financial institution.Even if you hire a financial institution to create and manage the plan, you still retain certain duties. For example, you must act in the best interest of the plan’s participants when you select and continue to employ the financial institution. This means you must continually monitor the institution:
- Always read any reports that the financial institution provides. Follow up with the institution if you don’t understand something.
- Check the actual fees charged. Make sure they are the same amount as what the institution claims.
- Always follow up on complaints by plan participants. Keep detailed information about the person’s complaints and document how you raised the issue with the financial institution.
- Regularly review the institution’s performance. Raise any concerns you have with the institution in writing.
Creating a Defined Benefit Plan
Understand defined benefit plans.With this plan, you guarantee your employees that they will get a certain, fixed amount of money during retirement.Defined benefit plans are becoming increasingly rare. They also differ from IRAs in a few ways:
- A defined benefit plan is the most administratively complex and expensive.
- You generally must file financial forms with the IRS each year if you have a defined benefit plan.
- You will need an enrolled actuary to determine your funding levels and sign off on forms you file with the federal government.
- You can generally contribute more (and deduct from your taxes) than you can with other plans.
Meet with a financial advisor.You should find a finance professional to discuss whether or not creating a defined benefit pension would be ideal. You can find financial advisors in the following ways:
- Ask other small businesses that have defined benefit pensions if they would recommend their financial advisor.
- Perform an Internet search. Type “defined benefit pension providers” into your favorite search engine. Defined benefit services are offered by many of the largest financial institutions, such as Wells Fargo and MassMutual.
Fill out the paperwork.The financial advisor should have paperwork that you can fill out to start the plan. The paperwork could be two pages or it could be 50 pages.The length depends on the financial advisor you work with and the details of the defined benefit plans they have created.
Understanding the Plan’s Effect on Your Business
Meet with an accountant.There are tax advantages to different retirement plans, and you should meet with your tax professional to discuss these.This person can help you figure out which plan is ideal for your small business.
- If you have never met with an accountant, then get referrals from other small businesses. If you can’t get any referrals, then look in the phone book for accountants.
Meet with your lawyer.Your lawyer can help you understand what duties you owe your employees with respect to the plan. A lawyer can also help answer any questions you have about what you should do if a disagreement arises between you and the financial institution that administers your plan.
- To find a qualified attorney, you can get referrals from other small businesses who have retirement plans for their employees.
- If you can’t get any referrals from people in the business community, then contact your local or state bar association and ask for a referral to an attorney who works with small businesses. You can find your nearest bar association by visiting the American Bar Association website.
Ask people you interview if offering a retirement plan matters.If you are not quite yet sold on adopting a retirement plan, you should try to see if prospective employees consider it important. Some experts think that you will be able to hire and hold onto talented employees if you offer a retirement plan.
- You can ask this discreetly, by asking an open-ended question: “What about the job attracted you?” Alternately, you could have applicants fill out a survey.
Video: When Does It Make Sense to Offer Employees a Retirement Plan?
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