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The 401(k) Plan of [Name of Company] How Our Plan Works and Its Benefits for Employees An Employee Communication Presentation
©SHRM Introduction Fewer and fewer employers are offering employees traditional pension plans that provide for a defined retirement benefit. Consequently, employees must now take responsibility for planning their retirement income years in advance of their actual retirement. To help employees in this effort, many employers are offering 401(k) plans which allow employees to make pre-tax contributions for retirement savings and which may include employer matching contributions. This presentation is designed to inform you of how our 401(k) plan works. This sample presentation is intended for presentation to all employees. It is designed to be presented by an individual who has knowledge of 401(k) plans and the employers own plan. It is a sample presentation that must be customized to match the employers own 401(k) plan benefits.
©SHRM Agenda The agenda for our meeting today is: What is a 401(k) plan? How our plan works. Advantages and disadvantages of enrolling in the plan. When and how to enroll in our 401(k) plan. The minimum and maximum amounts for contributions. Employer matching program. Vesting schedule. Making changes to elections. 401(k) plan loans and withdrawals. What happens to the 401(k) plan in the event of a leave of absence or upon termination of employment. Tips for participating in our 401(k) plan.
©SHRM 2008 What is a 401(k) Plan? What is a 401(k) plan? A 401(k) plan is a type of employer-sponsored retirement savings plan that is funded by employee contributions and often matching contributions from the employer. 401(k) plans derive their name from the IRS Tax Code – Section 401, paragraph (k). This section of the Code allows for tax-qualified deferred compensation from employees. These deferred wages are not subject to income tax withholding at the time of deferral. This allows the funds to grow tax-free until withdrawn, at which point they are taxed. 401(k) plans are generally self-directed and are portable, meaning employees may transfer them upon changing jobs.
©SHRM 2008 What is a 401(k) Plan? (contd) A 401(k) plan is a defined contribution plan. Defined Contribution Plan An individual account plan to which employees contribute tax- free, and to which the employer may contribute a specific amount of money that is distributed to the accounts of each plan participant. Because the benefit is not defined, the retirement outcomes are not known in advance. Defined Benefit Plan A retirement plan that is managed exclusively by the employer. It provides vested participants with a fixed periodic benefit or a lump-sum amount, calculated using specific formulas that include such factors as age, earnings and length of service. 5
©SHRM 2008 How Our 401(k) Plan Works The Companys investment committee selects a variety of funds for employees to invest in. Investments are made according to employee selections. > NOTE: You determine the mix of funds you want to invest in. We are not permitted to give investment advice; you should consult your own investment advisor. If you neglect to make a fund selection, the fund selection will default to [insert default fund]. When deciding which funds to select, it is a good idea to consider how far away from retirement you are (5, 10, 20 years or more) and your own personal level of comfort with risk and uncertainty. The funds are then sent to our third-party administrator, [insert name of administrator], who invests the money in mutual funds, bonds and money market accounts.
©SHRM 2008 How Our 401(k) Plan Works (contd) Each year, the Company has a discretionary match of [insert % match amount here]. You will be entitled to receive an employer matching contribution for a particular plan year only if you work at least 1,000 hours during the plan year and you are employed by the Company on the last day of the plan year. The funds, like many investments, will fluctuate with the stock and bond markets. Vesting schedule: > The term "vesting" refers to your non-forfeitable right to the money in your account. > You are always 100% vested in your deferral contributions account and in any rollover plans contributions from a previous employer. > For matching employer contributions, you are vested based on your number of service years. 7
You are always 100% vested in your deferral contributions account and in any rollover plans contributions from a previous employer. > For matching employer contributions, you are vested based on your number of service years. 7">
©SHRM 2008 Questions? Comments? 8
©SHRM 2008 Advantages and Disadvantages Advantages of participating in the 401(k) plan Because employee contributions are pre-tax, participation reduces your taxable income. You will see examples of how this works in the next few slides. Employer contributions and any increases in the value of your account remain tax-free until you are ready to withdraw funds. While the funds may not always grow in a down market or if you are not in the funds for a long time, the compounding effect may be significant. You have control. You decide where to direct your contributions. Our company match is like getting extra money in addition to your own contributions.
©SHRM 2008 Advantages and Disadvantages (contd) If you change jobs, you can move your account to your new employers plan or to an Individual Retirement Account (IRA). 401(k) plans are protected by ERISA. > Protected from garnishments or attachments by creditors, except when dealing with divorce decrees or child support orders (Qualified Domestic Relations Orders). Subject to higher limits than personal IRAs. 10
©SHRM 2008 Example The following example is based on an annual salary of $36K with a 401(k) salary deferral of 10% – which represents $38 additional take-home pay a month! (Payroll taxes calculated to assume a 25% payroll tax rate which encompasses federal and state taxes, social security and Medicare.) 11 Without the 401(k) planWith the 401(k) plan Gross Earnings$1,500Gross Earnings$1,500 Pre-Tax 401(k) Deferral-$150 Taxable Income$1,500Taxable Income$1,350 Payroll Taxes-$375 Payroll Taxes-$338 Net Income$1,125$1,013 Post-Tax 401(k) Deferral-$150 TAKE-HOME PAY$975TAKE-HOME PAY$1,013
©SHRM 2008 Example This following example is based on an annual salary of $120K and a 401(k) salary deferral of 10% ($175 additional take-home pay a month!). (Payroll taxes calculated to assume a 35% payroll tax rate which encompasses federal and state taxes, social security and Medicare.) 12 Without the 401(k) planWith the 401(k) plan Gross Earnings$5,000Gross Earnings$5,000 Pre-Tax 401(k) Deferral-$500 Taxable Income$5,000Taxable Income$4,500 Payroll Taxes-$1,750 Payroll Taxes-$1,575 Net Income$3,250$2,925 Post-Tax 401(k) Deferral-$500 TAKE-HOME PAY$2,750TAKE-HOME PAY$2,925
©SHRM 2008 Advantages and Disadvantages (contd) Disadvantages of participating in the 401(k) plan Your investment options are limited to the funds that we offer. It is difficult to access your funds before age 59 ½ without penalty. > If you withdraw money before reaching age 59 ½, you will have to pay taxes on the withdrawn amount plus pay a 10% penalty. Though 401(k) plans are generally a safe and effective method of saving, if you choose to put your money in risky investments, your account may not grow as quickly as you anticipate. Additionally, because funds fluctuate with the stocks and bonds markets, there will be ups and downs in your savings. All investment plans carry some degree of risk and uncertainty. 13
©SHRM 2008 Questions? Comments? 14
©SHRM 2008 Enrollment When do I enroll in the 401(k) plan? Upon Hire > New hires may enroll effective the 1 st of the month after 3 full months of employment. Throughout the Year > Employees may enroll any time throughout the plan year, effective the 1 st of the next month: Between 1 st and 15 th of the month, effective 1 st of the following month (e.g., enroll on 6/1, effective 7/1). Between 16 th and end of the month, effective 1 st of the next month immediately following change (e.g., enroll on 6/16, effective 8/1). 15
©SHRM 2008 Enrollment (contd) How do I enroll in our 401(k) plan? You enroll by completing the 401(k) Plan Election/Change Form in your new hire packet or by downloading enrollment forms from our intranet. Return the completed forms to Human Resources. (Note to Presenter: You will need to revise this portion of this slide if you use a web- based, self-service enrollment tool.) 16
©SHRM 2008 Maximum/Minimum Elections What is the maximum I can contribute to my 401(k) plan? > You may contribute any whole percentage of your salary up to the IRS imposed limit (which for this year is xxxxx). If you are age 50 or older, you may contribute additional catch-up monies (which for this year are xxxxx). What is the minimum I can contribute to my 401(k) plan? > The minimum contribution is 1% of your base salary. (Note to presenter: Be sure to fill in the current IRS limits.) 17
©SHRM 2008 Employer Matching Program Each time you make a contribution, the Company matches your contribution. The match is xxxxx. Both your contributions and the Companys matching contributions are sent to [insert administrators name] at the end of each month and are invested in the funds you have selected. The Company contributes the match only during the months that you make a contribution. (Note to Presenter: Be sure to fill in match amount.) 18
©SHRM 2008 Vesting Schedule Years of Work – Vested Percentage of Accrued Employer-Match Benefits 19 No. of Years of ServicePercentage Vested Less than 3 Years0% At least 3, but less than 4 Years20% At least 4, but less than 5 Years40% At least 5, but less than 6 Years60% At least 6, but less than 7 Years80% At least 7 Years100%
©SHRM 2008 Questions? Comments? 20
©SHRM (k) Plan Election Changes When can I make changes to my 401(k) plan elections? You can make changes to the 401(k) plan at any time. Simply complete the 401(k) plan Election/Change Form by downloading the forms from our intranet. Return the completed form to Human Resources. Changes will be effective the next pay period or the subsequent pay period, depending on the date you submit changes. (Note to Presenter: You will need to revise this portion of this slide if you use a web- based, self-service tool.)
©SHRM 2008 Loans When you take a loan from your 401(k) account, you are actually borrowing money from yourself. The interest on your loan is paid back to your account. You can borrow up to $50,000 or 50% of your 401(k) plan balance, whichever is less. The minimum you can borrow is $1,000. You may have only one loan outstanding at any given time. If you have an existing loan, you may not apply for another loan until the existing loan is paid in full. You may not refinance an existing loan or obtain a second loan for the purpose of paying off the existing loan. You may continue to contribute to the plan while you repay your loan. 22
©SHRM 2008 Loans (contd) There is a $75 application fee associated with taking a loan from the 401(k) plan. There are no maintenance fees. Your loan will bear 1% plus prime interest rate at the time the loan is processed as determined by the plan administrator based on prevailing commercial interest rates. The interest rate will remain the same for the duration of the loan. Interest paid on your loan is not tax deductible. You must repay your loans within five years unless it is for the purchase of your principal residence, in which case you may repay your loan over a 15-year period. Loan repayments will be deducted from your paycheck at each pay period. Special repayment rules may apply if you go on an approved leave of absence. Repayments on the loan are on an after-tax basis. 23
©SHRM 2008 Loans (contd) There are no taxes or penalties as long as you repay your loan on time. If you do not repay your loan, your loan will be treated as a withdrawal and you will be required to pay current income taxes on the balance. Additional penalties may apply if you are under age 59 ½. If you terminate employment with the Company before the loan is repaid, your entire outstanding principal and accrued interest will be immediately due and payable. If you dont repay your loan immediately, you will be deemed to have received a taxable distribution from the plan, with all applicable penalties. To apply for a loan, call [plan administrator] to initiate the loan request. You should receive your check within three weeks from the time you place your request. 24
©SHRM 2008 Withdrawals Hardship Withdrawals With approval from the Plan Administrator, you may withdraw from your 401(k) plan in order to satisfy any of the following immediate financial needs: > To pay unreimbursed medical expenses for you, your spouse or dependents; > To purchase your principal residence; > To prevent eviction from or foreclosure on your principal residence; > To pay for post-secondary educational expenses (tuition, related educational fees, room and board) for you, your spouse or dependents for the next 12 months; or > Any other immediate financial needs as allowed under IRS regulations. 25
©SHRM 2008 Withdrawals (contd) If you are married, your spouses consent may be required for approval of the withdrawal. NOTE: Withdrawals should be your last option. If you take a withdrawal, you will be required to pay 20% mandatory withholding tax on your pre-tax contributions, as well as an additional 10% penalty! 26
©SHRM 2008 Withdrawals (contd) Withdrawals after age 59 ½: If you are age 59 ½, you may elect to withdraw your entire vested account balance without penalty. If you are married, your spouses consent may be required if any of the assets in your account are attributable to assets transferred from another plan or have retained protected benefits. Withdrawals after age 70 ½: You are required to begin to receive minimum distributions from the plan by April 1 of the calendar year following the calendar year in which you reach age 70 ½ or you retire, whichever is later. 27
©SHRM 2008 Questions? Comments? 28
©SHRM 2008 Leave of Absence and Your 401(k) Plan During an unpaid leave-of-absence, neither you nor the Company will contribute to the 401(k) plan. However, your account will be maintained and you will continue to participate in the investments you have selected. During a paid leave-of-absence, you may continue to contribute to the 401(k) plan by payroll deduction. Contributions will be based on your salary during your leave, and the Company will continue to match your contributions. 29
©SHRM 2008 Termination and Your 401(k) Plan If you terminate employment, die, become disabled or retire, your account balance is distributable. Termination > Upon termination, if your account balance is $5,000 or less, your account balance will be automatically distributed to you. To avoid the mandatory 20% withholding tax as well as the additional 10% penalty, be sure to roll over your balance into a qualified plan within 60 days of termination. Rollover forms will be available upon termination. > If your balance exceeds $5,000, you must consent in writing to receive the distribution from the plan. Your balance will remain with the plan until you actively elect distribution. 30
©SHRM 2008 Termination and Your 401(k) Plan (contd) Death > In the event of your death, the value of your account is payable to your beneficiary. If you are married, your sole beneficiary will be your spouse. If you are married and you designate a person other than your spouse as your beneficiary, your spouse must consent in writing to the designation. Disability > If you become disabled while you are a participant in the plan and you terminate your employment with the employer, you are eligible to receive a distribution of your account balance. 31
©SHRM (k) Plan – Tips for Participating Tips for participating in our 401(k) plan The 401(k) plan is intended to be a long-term retirement savings plan. It is not a bank account to be used for short-term expenses. Plan your contributions carefully and diversify your elections. Review options with a financial planner. Monitor your balance periodically to keep track of your account. In a volatile market, you may want to consider revising your investment options to minimize loss. 32
©SHRM Summary A 401(k) plan is an employer-sponsored retirement savings plan that is funded by your pre-tax contributions and by the Companys matching contributions. The Companys investment committee chooses the investment funds. You decide how much money you want to go into your account and [insert name of administrator] invests the money in mutual funds, bonds and money market accounts. Advantages of participating in the plan include reducing your taxable income; receiving employer matching contributions; and experiencing growth in your account tax-free until you are ready to withdraw. Disadvantages of participating include somewhat limited investment options and difficulty in accessing funds without penalties before age 59 ½.
©SHRM 2008 Summary (contd) You can enroll in the plan as long as you have worked 3 months and at least 50% of a full-time schedule. You may make changes to the plan at any time. You may download forms from our intranet, and complete and return them to HR to be processed. The maximum you may contribute is set by annual IRS limits. The minimum you may contribute is 1% of your pay. The Company matches [insert matching amount here]. The Company has a tiered vesting schedule, based on years of service. After 7 years of service, you are fully vested in the employer matching contributions. You are always 100% vested in your own contributions. 34
©SHRM 2008 Summary (contd) You are eligible for loans and withdrawals from the 401(k) plan. However, there may be fees and penalties involved. You may be able to continue participating in the plan while on a leave of absence, depending on if the leave is paid or unpaid. If you terminate employment, you will be eligible for account distributions. You will need to plan your contributions carefully and diversify your elections to receive maximum benefit from this excellent way to save for retirement. 35
©SHRM Questions? Comments?
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