Employer-sponsored retirement plans are an important aspect of employee well-being, as well as an effective tool for recruitment and retention. As an employer, or plan sponsor, it’s important you offer a plan that best suits the needs of your workforce. However, a lot of responsibility comes with designing, implementing, and maintaining an employer 401(k) plan for your employees. With so many factors to consider and regulations to comply with, it’s only natural to have questions.
To help you learn more about employer 401(k) plans and other forms of retirement plans, here are the answers to our most frequently asked questions (FAQs). If you have a question that is not answered below, click contact us and fill out the form, we will reach out to answer your question.

What is TPA?

Third-Party Administrator (TPA) – What is a TPA? Definition – A third-party administrator is an organization that manages many day-to-day and annual aspects of your employee retirement plan. A good TPA helps to keep your retirement plan in compliance with all Internal Revenue Service (IRS) and Department of Labor (DOL) regulations. A good TPA is your best support in maintaining your plan’s compliance! As a Third-Party Administrator (TPA), the staff of Meta Pension Consultants assist the Plan Sponsor (typically the Employer) in fulfilling duties required under both the terms of the plan and governmental agencies. At Meta Pension Consultants the administrators and actuaries typically provide services which include, but are not necessarily limited to: Assist and communicate with other plan partners (such as financial advisors, investment provider/recordkeepers and CPAs) regarding their clients’ retirement plans. Design, produce, amend and restate (update) the required retirement plan document and other retirement plan materials. Create basic annual fee disclosures and plan notices. Aid in the transition (if applicable) from the plan’s current investment platform to a newly selected investment platform. Reconcile at least annually participant accounts against employer’s payroll. Provide annual trust accounting of participant accounts. Prepare employer and employee benefit statements. Prepare individual benefit calculations. Assist in processing all types of distributions from the plan. (If applicable) Prepare loan paperwork for plan participant and trustee/fiduciary execution. Conduct annual compliance testing of the plan to gauge the plan’s compliance with all IRS non-discrimination requirements as well as plan and participant contribution limits. Provide calculation and allocation of employer contributions and forfeitures. Provide calculation of and maintain participant vested percentages. Prepare annual governmental returns and reports including the Form 5500 and applicable schedules which are required by the IRS, DOL or other government agencies. (If applicable) Assist in plan audit. Provide other miscellaneous duties as required by the employer/plan sponsor/Fiduciary.

What is ERISA?

ERISA stands for the Employee Retirement Income Security Act of 1974, which protects the retirement assets of American workers by governing how employers provide benefit plans to employees. ERISA established rules and duties that qualified plans and plan fiduciaries must follow to ensure decisions are made in the best interest of plan participants and that plan assets are not misused. ERISA is enforced by the Employee Benefits Security Administration (EBSA), which is an agency of the U.S. Department of Labor (DOL).

What are the different types of employer retirement plans?

A qualified plan is one that meets ERISA guidelines and standards concerning plan eligibility, discrimination, participation, vesting, benefit accrual, funding, information, and communication.

Common types of qualified plans include:

  • Defined Benefit plans
  • Employer 401(k) plans
  • Profit Sharing Plan

What is the difference between a defined benefit and defined contribution plan?

The difference between defined benefit plans and defined contribution plans lies in what is promised to plan participants. Defined benefit plans offer a specific payment upon retirement. This defined payment may be a fixed dollar amount, or it may depend on a formula that considers factors such as salary and tenure. An example of a defined benefit plan is a pension plan.
Conversely, in a defined contribution plan, the participant and/or the employer contribute to the participant’s individual retirement account (IRA) under the plan, and the participant receives the balance of their account upon retirement. In this case, there is no specific payment promised—rather, the benefit received depends upon the contributions, plus or minus any investment gains or losses. One of the most common forms of defined contribution plans is the employer 401(k) plan.

What is an employer defined benefit plan?

A defined benefit plan, funded by the employer, promises you a specific monthly benefit at retirement. The plan may state this promised benefit as an exact dollar amount, such as $100 per month at retirement. Or, more often, it may calculate your benefit through a formula that includes factors such as your salary, your age, and the number of years you worked at the company. For example, your pension benefit might be equal to 1 percent of your average salary for the last 5 years of employment times your total years of service.

What qualifies as compensation for the purposes of a defined benefit plan calculation?

Compensation must be earned income from active employment in the business sponsoring the plan. Generally, this is all income that is subject to FICA taxation. For a sole proprietor, compensation would equal net earned income from the business after deducting employer FICA taxation and qualified retirement plan contributions. This can also include W-2 earnings if the business files as a corporation. Passive income such as rental income or shareholder income does not qualify.

Do I need to run the defined benefit plan for a minimum number of years?

The IRS expects a plan to be maintained for the purpose of accumulating retirement assets. Clients seeking short-term tax relief who do not expect to run the plan until the stated date they anticipate retiring from their company run the risk of the IRS disqualifying the plan as a tax shelter rather than a valid retirement plan.

What if I own other businesses or my spouse owns a business?

Businesses under common ownership could be considered a single business for defined benefit plan participation and benefit coverage rules. For example, if you own or partially own two or more businesses (or your spouse also owns a business and you have a child under age 21), then ALL of the employees of all commonly controlled businesses could be required to be covered under your defined benefit plan. This could cause you to cover employees beyond your immediate business, which could significantly increase the contributions to the plan. You should work with your attorney and accountant to make this determination.

What if I have sponsored a defined benefit plan in the past?

The benefits you earned under that previous plan will reduce the amount of benefits you earn under any new defined benefit plans. Therefore, if you earned a high benefit in a past defined benefit plan your business (or past business) sponsored, the amount you can target in a new plan would be reduced.

What is 401(k) plan?

An employer 401(k) plan is a form of employer-sponsored retirement savings plan that allows a participating employee to have a percentage of each paycheck contributed directly to a tax-advantaged investment account. Often, the employer will “match” part or all the employee’s contribution, meaning they will contribute to the account as well. The employee typically chooses from a range of investment options, often including mutual funds, which are selected by the plan sponsor (usually the employer).

There are two main types of 401(k) plans, and each has unique tax benefits:

  • In a traditional 401(k), contributions are taken from the employee’s paycheck before tax, so taxes are deferred on the contributions. This means taxes are only assessed upon withdrawal, which is usually in retirement. These tax-deferred contributions lower the employee’s taxable income in the year of the contribution. Additionally, investment returns, such as dividends and interest, are reinvested in the traditional 401(k) plan account, and thus not taxed.
  • In a Roth 401(k), contributions are taken from the employee’s after-tax income. This means there is no tax deduction in the year of the contribution; however, no additional taxes are owed on the contribution or the investment earnings when the money is withdrawn in retirement (given the employee is at least 59½ years old and has had the Roth 401(k) for a minimum of five years). In a Roth 401(k), contributions are taken from the employee’s after-tax income. This means there is no tax deduction in the year of the contribution; however, no additional taxes are owed on the contribution or the investment earnings when the money is withdrawn in retirement (given the employee is at least 59½ years old and has had the Roth 401(k) for a minimum of five years).

What is Profit Sharing Plan?

A profit sharing plan allows the employer each year to determine how much to contribute to the plan (out of profits or otherwise) in cash or employer stock. The plan contains a formula for allocating the annual contribution among the participants.

Can you borrow from your 401(k) account?

401(k) plans are permitted to – but not required to – offer loans to participants. The loans must charge a reasonable rate of interest and be adequately secured. The plan must include a procedure for applying for the loans and the plan’s policy for granting them. Loan amounts are limited to the lesser of 50 percent of your account balance or $50,000 and must be repaid within 5 years

When does the employer need to deposit employee contributions in the plan?

If you contribute to your retirement plan through deductions from your paycheck, then the employer must follow certain rules to make sure that it deposits the contributions in a timely manner. The law says that the employer must deposit participant contributions as soon as it is reasonably possible to separate them from the company’s assets, but no later than the 15th business day of the month following the payday. For small plans (those with fewer than 100 participants), salary reduction contributions deposited with the plan no later than the 7th business day following withholding by the employer will be considered contributed in compliance with the law. In the Annual Report (Form 5500), the plan administrator is required to include information on whether deposits of contributions were made on a timely basis.

What happens when a plan is terminated?

Federal law provides some measures to protect employees who participated in plans that are terminated, both defined benefit and defined contribution. When a plan is terminated, the current employees must become 100 percent vested in their accrued benefits. This means you have a right to all the benefits that you have earned at the time of the plan termination, even benefits in which you were not vested and would have lost if you had left the employer. If there is a partial termination of a plan, (for example, if your employer closes a particular plant or division that results in the end of employment of a substantial percentage of plan participants) the affected employees must be immediately 100 percent vested to the extent the plan is funded.

Is your accrued benefit protected if your plan merges with another plan?

Your plan rules and investment choices are likely to change if your company merges with another. Your employer may choose to merge your plan with another plan. If your plan is terminated because of the merger, the benefits that you have accrued cannot be reduced. You must receive a benefit that is at least equal to the benefit you were entitled to before the merger. In a defined contribution plan, the value of your account may still fluctuate after the merger based on the performance of the investments.
Special rules apply to mergers of multiemployer defined benefit plans, which generally are under the jurisdiction of the PBGC. Contact the PBGC for further information.

What if your employer goes bankrupt?

Generally, your retirement assets should not be at risk if your employer declares bankruptcy. Federal law requires that retirement plans fund promised benefits adequately and keep plan assets separate from the employer’s business assets. The funds must be held in trust or invested in an insurance contract. The employers’ creditors cannot make a claim on retirement plan funds. However, it is a good idea to confirm that any contributions your employer deducts from your paycheck are forwarded to the plan’s trust or insurance contract in a timely manner. Significant business events such as bankruptcies, mergers, and acquisitions can result in employers abandoning their individual account plans (e.g., 401(k) plans), leaving no plan fiduciary to manage it. In this situation, participants often have great difficulty in accessing the benefits they have earned and have no one to contact with questions. Custodians such as banks, insurers, and mutual fund companies are left holding the assets of these plans but do not have the authority to terminate the plans and distribute the assets. In response, the Department of Labor issued rules to create a voluntary process for the custodian to wind up the plan’s business so that benefit distributions can be made, and the plan terminated.

Can other people make claims against your benefit (divorce)?

In general, your retirement plan is safe from claims by other people. Creditors to whom you owe money cannot make a claim against funds that you have in a retirement plan. For example, if you leave your employer and transfer your 401(k) account into an individual retirement account (IRA), creditors generally cannot get access to those IRA funds even if you declare bankruptcy. Federal law does make an exception for family support and the division of property at divorce. A state court can award part or all a participant’s retirement benefit to the spouse, former spouse, child, or other dependent. The recipient named in the order is called the alternate payee. The court issues a specific court order, called a domestic relation order, which can be in the form of a state court judgment, decree or order, or court approval of a property settlement agreement. The order must relate to child support, alimony, or marital property rights, and must be made under state domestic relations law. The plan administrator determines if the order is a qualified domestic relations order (QDRO) under the plan’s procedures and then notifies the participant and the alternate payee. If the participant is still employed, a QDRO can require payment to the alternate payee to begin on or after the participant’s earliest possible retirement age available under the plan. These rules apply to both defined benefit and defined contribution plans.
If you are involved in a divorce, you should discuss these issues with your plan administrator and your attorney.