What is it? a qualified defined contribution plan similar to a profit sharing plan

1. What is it? a qualified defined contribution plan • similar to a profit sharing plan • provides for and encourages after-tax employee contributions to plan • can have employer matching contributions • often part of profit share or 401(k) plan • may be replaced by Roth IRA

2. When is it indicated? • as add on to Sec. 401(k) to allow employees to increase contributions beyond annual limit on salary reductions for Sec. 401(k) • employees are • young • willing to assume investment risk • varied in need or desire for retirement savings

3. When is it indicated? • employer wants to supplement company defined benefit plan with plan that uses individual accounts and allows employees to save tax-deferred

4. Advantages • tax deferred savings for employees • employees choose amount to contribute • lump-sum distributions may be eligible for special 10 year averaging • individual participant accounts - participants benefit from profitable plan investments

5. Disadvantages • inadequate retirement savings • employees bear investment risk • administrative costs higher than alternatives (e.g. money purchase plan or profit sharing plan) • limit on annual additions may be too low for highly compensated

6. Design Features • voluntary participation • after tax employee contributions w/ employer match • vesting requirements of employer match same as top-heavy plans  3 year cliff or 2-6 gradual vesting • plan must meet nondiscrimination requirements • generous provision for employee fund withdrawal or loans

7. Design Features • plan can allow participant-investment direction; if regulations satisfied, plan trustee and employer relieved of fiduciary liability • employers can offer plans that combine features of • regular profit sharing plan • savings plan • Section 401(k) salary reductions

8. Tax Implications • employer contributions deductible when made • employee contributions • NOT tax deductible • tax deferred until distributed • to be deemed nondiscriminatory, must meet actual contribution percentage test (ACP) • can meet ACP test in alternative ways

9. Tax Implications for employee contributions • for HCEs, average ratio of employee contributions + employer matching contributions to compensation for plan year does not exceed greater of • 125% of ratio for all other eligible employees for preceding plan year or • lesser of (a) 200% of contribution % for all other eligible employees, or (b) such percentage plus 2 percentage points for the preceding plan year

10. Tax Implications if employer matching contributions must meet (a) or • meet requirements for SIMPLE 401(k) • utilize a safe harbor plan that, by design, satisfies • contribution requirement • notice requirement • matching contribution limitation

11. Tax Implications contribution requirement for safe harbor • employer must make either • matching contributions that meet certain % limits • nonelective contributions for all employees equal to 3% or more of compensation

12. Tax Implications notice requirement for safe harbor plan • before plan year begins, each eligible employee must be given written notice that • plan may be amended • if plan amended, notice will be given 30 days before last day of plan year

13. Tax Implications matching contributionlimitfor safe harbor plan met if • no employer match can be made for employee deferrals > 6% of compensation • rate of match does not increase as employee deferral rate increases • matching contribution rates for HCEs not greater than those for non-HCE

14. Tax Implications • some employers may be eligible for $500 tax credit for adopting a new plan • plan may allow employees to contribute to “deemed” IRA under the plan; such contributions will reduce amount can contribute to traditional IRAs or Roth IRAs • must follow rules for qualified plan distributions

15. Tax Implications • certain employees may be eligible for 10 year averaging • plan subject to ERISA reporting and disclosure rules

16. True or False? • Thrift plans are subject to the same dollar limits as elective deferrals. • Older employees benefit more from savings/thrift plans than younger employees. • Contributions to savings/thrift plans are made before-tax.

17. True or False? • Employees bear risk under a savings/thrift plan. • Administrative costs for savings/thrift plan are higher than for a profit share plan without employee contributions. • An employer can offer a plan that combines features of a regular profit sharing plan, a savings plan, and Section 401(k) salary reductions.

18. Discussion Question Evaluate the possible impact of the Roth 401(k) on savings plans (or ‘thrift plans’).