1. Section 401(k) Chapter 20 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company1 What is it? qualified profit sharing or stock bonus plan that gives plan participants option to put money in plan – tax deferred receive same amount in cash – taxable often called “cash or deferred arrangement” or CODA

2. Section 401(k) Chapter 20 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company2 When is it indicated? 1.employer wants qualified plan but can only afford minimal costs 2.employer willing to meet minimal funding requirement for non-HCEs and wants to maximize contributions for HCEs without annual ADP tests

3. Section 401(k) Chapter 20 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company3 When is it indicated? 3.employee group a.would like choice regarding saving level b.young c.willing to accept risk 4.employer wants ‘savings type’ plan to supplement defined benefit plan 5.employer is private tax-paying or tax exempt organization

4. Section 401(k) Chapter 20 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company4 Advantages 1.tax-deferred savings for employees 2.gives employees some choice in amount to save 3.employer may contribute and deduct up to 25% of payroll for covered employees in addition to elective deferrals 4.can fund via employee salary reductions

5. Section 401(k) Chapter 20 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company5 Advantages 5.some plan distributions may be eligible for special 10 year averaging on lump-sum distributions 6.in-service withdrawals for certain “hardships” may be permitted

6. Section 401(k) Chapter 20 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company6 Disadvantages 1.account balance at retirement may be inadequate 2.annual employee salary reduction limited to $16,500 (2009); over-50 also given ‘catch-up’ provisions of $5,500 (2009) 3.costly and complex to administer 4.employees bear investment risk

7. Section 401(k) Chapter 20 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company7 Design Features: Salary Reductions can use salary reduction OR give employees “bonus” that they can receive in cash or contribute to plan can use automatic enrollment employees MUST elect salary reduction BEFORE salary earned -usually complete election form before end of each calendar year -can reduce or withdraw election on amounts not yet earned

8. Section 401(k) Chapter 20 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company8 Design Features: Salary Reductions participant always 100% vested in salary reduction and plan earnings on those reductions account balance usually distributed as lump sum at retirement plan faces ‘per employee’ elective deferral limit that applies to both pre-tax elective and Roth contributions

9. Section 401(k) Chapter 20 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company9 Design Features: Salary Reductions to determine “per employee limit” employee must add together each year all elective deferrals from: –Section 410(k) plans –salary reduction SEPs est. before 1997 –SIMPLE IRAs –Section 403(b) plans

10. Section 401(k) Chapter 20 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company10 Design Features: Salary Reductions employees over 50 can make “catch-up” contributions plan may permit employees to make voluntary contributions to “deemed IRA” established under the plan contributions may count toward nonrefundable ‘savers credit’ for lower-income taxpayers

11. Section 401(k) Chapter 20 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company11 Design Features: Employer Contributions Common types: –formula matching –discretionary matching –pure discretionary or “profit sharing” –formula contributions

12. Section 401(k) Chapter 20 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company12 Design Features: Plan Distributions subject to qualified plan distribution rules in-service withdrawals permitted elective deferrals cannot be distributed prior to –retirement, death, or disability of employee –severance from employment with employer –employee reaches age 59 ½ –plan termination –hardship

13. Section 401(k) Chapter 20 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company13 Design Features: Plan Distributions early withdrawals that do not meet exceptions face –income tax on amount withdrawn –10% penalty

14. Section 401(k) Chapter 20 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company14 Design Features: Plan Distributions withdrawals exempt from 10% penalty –made after employee is age 59½ –due to employee’s death or disability –part of a series of substantially equal periodic payments following separation from service –paid after separation from service after attaining age 55 –do not exceed amount of medical expenses deductible as an itemized deduction for the year

15. Section 401(k) Chapter 20 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company15 Design Features: Plan Distributions plan loans allows access to funds without the hardship’ restriction or 10% penalty

16. Section 401(k) Chapter 20 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company16 Tax Implications employee elective deferrals -income tax deferred -subject to Social Security tax for employer and employee sum of all types of employer contributions to 401(k) deductible to 25% total payroll

17. Section 401(k) Chapter 20 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company17 Tax Implications elective deferrals (not nonelective employer contributions) subject to -social security (FICA) -federal unemployment (FUTA) elective deferrals must meet ADP test for nondiscrimination

18. Section 401(k) Chapter 20 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company18 Tax Implications annual additions to each participant account faces Sec. 415 limits -- the lesser of -100% of compensation or -$49,000 (2009)

19. Section 401(k) Chapter 20 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company19 Tax Implications annual additions are sum of: nonelective employer contributions to participant account salary reductions or other elective deferrals contributed to account forfeitures from other participant’s account after-tax employee contributions to the account

20. Section 401(k) Chapter 20 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company20 Tax Implications distributions from plan taxed when employee receives them limited nonrefundable tax credit (saver’s credit) available to certain lower income taxpayers who make salary deferrals certain employers may be eligible for business tax credit of up to $500 for ‘qualified start up costs’

21. Section 401(k) Chapter 20 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company21 How to install a plan plan installation follows rules for qualified plans plan participants must complete elective deferral or salary reduction forms before plan’s effective date safe harbor or SIMPLE 401(k) must provide note of plan availability prior to commencement of plan year

22. Section 401(k) Chapter 20 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company22 How to install a plan effective employer-employee communication essential if contributions of non-HCEs threaten loss of nondiscriminatory status, employer can adopt safe harbor or SIMPLE 401(k) to remove plan from ADP testing.

23. Section 401(k) Chapter 20 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company23 True or False? 1.A Section 401(k) plan can be funded entirely from employee salary reductions. 2.Unlike qualified pension plans, Section 401(k) plans allow in-service withdrawals for certain specified ‘hardships’ 3.A Section 401(k) plan is advantageous for relatively older workers entering the plan

24. Section 401(k) Chapter 20 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company24 True or False? 4.A worker is always 100% vested in all additions to their Section 401(k) plan. 5.Employees can elect salary reductions either before salary earned or within a month after earnings have been received. 6.Section 401(k) plans that permit employees to make contributions to a “deemed” IRA under the plan reduce the limit for traditional or Roth IRA contributions.

25. Section 401(k) Chapter 20 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company25 Discussion Question How can an employer provide retirement benefits to replace 401(k) benefits lost by an executive as a result of the $245,000 (2009, indexed) compensation cap?