Salary Reduction §403(b) Programs ^[Top]

Available to public schools, churches, hospitals and other non-profit organizations qualified under §501(c)(3), salary reduction §403(b) plans are funded exclusively with employee contributions.

Traditional §403(b) accounts* can provide your employees with immediate tax savings. Participants make contributions pre-tax, thus reducing their taxable income, and their accounts grow on a deferred basis. Income taxes are due upon distribution.

Since Roth §403(b) accounts* are funded with after-tax dollars, withdrawals are income tax-free, as long as the investments have been in the account for five consecutive years.

Not only are §403(b) plans a great tool for helping employees plan for their retirement, they are also a terrific benefit that employers can offer to help retain loyal employees and reward them for the service they provide. The investment options available in a §403(b) account are fixed annuities, variable annuities and mutual funds.

*Distributions prior to age 59 ½ may be subject to a 10% IRS penalty in addition to ordinary income taxes.

Employer-Sponsored §403(b) Programs ^[Top]

Available to public schools, hospitals, churches and other non-profit organizations qualified under §501(c)(3), employer-sponsored §403(b) plans are funded with both employer contributions and employee salary reduction contributions. Employer contributory plans (other than those maintained by governmental agencies) must meet the requirements of the Employee Retirement Income Security Act of 1974 (ERISA). §403(b) accounts can provide employees with immediate tax savings. Participants make contributions pre-tax, thus reducing their taxable income, and their accounts grow on a tax-deferred basis.

Not only are §403(b) plans a great tool for helping employees plan for their retirement, they are also a terrific benefit that employers can offer to help retain loyal employees and reward them for the service they provide. In addition to employee deferrals, non-elective and/or matching employer contributions can greatly assist employers in their benefits endeavors and enhance employees’ retirements. The investment options available in a §403(b) account are fixed annuities, variable annuities and mutual funds.

§457 Deferred Compensation Plans ^[Top]

Available to state and local governmental agencies, §457 plans are funded with employee salary reduction contributions. §457 accounts provide employees with immediate tax savings. Participants make contributions pre-tax, thus reducing their taxable income, and their accounts grow on a tax-deferred basis.

In addition to being a great tool for helping employees plan for their retirement, §457 plans are also a fantastic benefit that governmental agencies can offer as an incentive to retain loyal employees and reward them for the service they provide. The investment options available in a §457 plan are normally mutual funds, fixed annuities and variable annuities.

For-Profit Employer Plans ^[Top]

Corporations, partnerships and sole proprietorships can offer their employees a valuable benefit — the sense of security that comes with knowing they have a workable plan in place to save for retirement. Our broker-dealer partner, The Legend Group, offers several types of retirement plans specifically geared toward the for-profit employer, such as SEP-IRA, SIMPLE IRA, §401(k), profit sharing and money purchase pension plans.

Simplified Employee Pension (SEP) ^[Top]

SEP is an acronym for Simplified Employee Pension. Since their introduction in 1978, SEPs have gained tremendous popularity, particularly as a plan for sole proprietors. This is due to the fact that the only contributions allowed under a SEP IRA are employer contributions. Employer SEP contributions are deposited into an employee’s Traditional IRA account. If an employer is making a contribution for herself, expressed as a percentage of her compensation, she must also make a like contribution for all of her eligible employees. This means that the same percentage of their compensation must be contributed for their benefit. The most restrictive the employer can be in determining eligibility is requiring an employee to have earned $550 in any three of the last five years and be 21 or older in order to participate in employer contributions.

If an employer has adopted a prototype SEP IRA, such as those offered by a mutual fund family, brokerage house or insurance company, all contributions must go to that vendor. If the employer has adopted the IRS model 5305-SEP, the employee may set up an IRA with any vendor he chooses and the employer must send the contribution to that vendor.

The maximum that an employer can contribute in 2010 to an employee’s IRA is the lesser of $49,000 or 25% of the employee’s salary and the maximum salary that can be included in this calculation is $245,000. (These limits are subject to cost-of-living adjustments each year.) If the employee in question is a sole proprietor using Schedule C, the 25% of salary translates into a formula as follows: net worth on Schedule C minus ½ the individual’s Self Employment Tax times 20%.

SIMPLE IRA ^[Top]

SIMPLE IRAs were introduced by the Small Business Job Protection Act of 1996. They first became effective in 1997, replacing the SAR SEP plan. A SIMPLE IRA can be adopted by an employer with under 100 employees as long as no other retirement plan is maintained in the same calendar year other than one for a union, which is subject to a collective bargaining agreement.

An employee can defer up to $11,500 in 2010 to his/her SIMPLE IRA account established pursuant to the employer’s SIMPLE plan. The Economic Growth and Tax Reconciliation Relief Act of 2001 introduced the Over-Age-50 Catch-Up, which allows an individual attaining age 50 or more to defer an extra $2,500 in 2010. (These limits are subject to cost-of-living adjustments each year.)

An employer must make a contribution to the SIMPLE IRA plan – either a 3% matching contribution or a 2% non-elective contribution. The most restrictive an employer can be in determining eligibility is requiring an employee to earn at least $5,000 with the employer in any two of the last five years and to be reasonably expected to make $5,000 in the current year.

401(k) Plans ^[Top]

The 401(k) Plan was named after a section of the 1978 Internal Revenue Code; a 401(k) is an employer-sponsored qualified retirement savings plan. The federal government established the 401(k) in 1981 with special tax advantages to encourage people to prepare for retirement. A 401(k) allows employees to save for retirement, while deferring any immediate income taxes on both the money saved and on their investment earnings until withdrawn.

Through a 401(k), employees can authorize an employer to deduct a certain amount of money from their paycheck, before taxes are calculated, and to invest it in the 401(k) plan. The money is invested in the options that the employee chooses from the ones offered through the employer’s plan.

The amount invested in an employee’s 401(k) cannot exceed the annual IRS dollar limit, which is $16,500 in 2010. Cost of living adjustments, applied in $500 increments, may increase standard limits in future years.

Employers may offer a "match" or "matching contribution" as an incentive to join the company retirement plan. It means that the company will contribute a certain amount to an employee’s account (usually between $0.25 and $1.00) for every dollar that is contributed, up to a certain limit. The match formula can vary. To receive the matching contribution, the plan may require that an employee work a specified number of years.

Profit Sharing Plans ^[Top]

Profit Sharing Plans can be adopted by all types of businesses. Any employee with 1,000 hours of service within one year and who is age 21 or older is typically covered under this plan, if the plan is in place. If immediate 100% vesting is offered, two years of service may be required. The employer’s contribution is a flexible contribution; however, employers must make “substantial and recurring” contributions.

The maximum total plan contribution that the employer can deduct is 25% of total eligible payroll (maximum eligible pay per participant is $245,000 in 2010). The maximum annual allocation to the participant’s account is 100% of participant’s total pay or $49,000 in 2010, whichever is less. This includes both employer and participant’s contributions. No participant deferrals are allowed without adding a 401(k) feature.

The benefit to employers is that the flexible contribution requirements allow employers to adjust their yearly contributions depending on the profitability of the company, as long as those contributions are ‘frequent and ongoing.” Tying employer contributions to company performance provides participants with an incentive to help make the business profitable.

Money Purchase Pension Plans ^[Top]

Money Purchase Pension Plans can be adopted by all types of businesses. Any employee with 1,000 hours of service within one year and who is 21 or older is typically covered under this plan, if the plan is instated. If immediate 100% vesting is offered, two years of service may be required. The employer contribution is nondiscretionary. The maximum total plan contribution that the employer can deduct is 25% of the participant’s pay. The maximum eligible pay per participant is $249,000 for 2010. There are no participant deferrals allowed in this plan. The benefit to the employer is that the fixed annual contribution requirements make it easier to budget retirement plan expense.