What Is A Retirement Plan

A Retirement plan is system to provide people with income when they are no longer working (retired).  The Retirement plan will pay the retired employee a percentage of his/her pay based on what they were earning while still employed or based on the amount earned by the fund they contributed to.  Payment is made on a regular basis (semi-monthly, monthly, etc.).

Retirement pay is also synonymous with pension.

Do You have to Offer Your Employees A Retirement Plan

Should You Offer A Retirement Plan to Employees

Consider that in addition to pay employees look at the total benefits package when determining who they should go to work for.  A retirement plan is an important benefit package that will make your business competitive in finding and retaining good employees.

Retirement Plan Classification

Retirement plans may be defined as Defined Benefit, Defined Contribution or Hybrid.

Defined Benefit:
This plan defines a certain payout at retirement depending on a formula which includes the number of years in the plan and the individual's salary for the last few years of work.

Defined Contribution:
This plan pay out money depending on the amount that the individual contributed to the plan and the performance of the investment vehicle chosen.

Hybrid:
There are hybrid plans which contain elements of the Defined Benefit and Defined Contribution plans such as Cash Balance and Pension Equity plans.

What is ERISA

ERISA (Employee Retirement Income Security Act) is the federal law that covers retirement plans.  States are not permitted to write their own laws on retirement plans, except for Hawaii.  Employers in Hawaii have to comply with both state and federal retirement laws.

Key features of ERISA:
- Does not require minimum benefit levels
- It regulates the operation of the plan once it has been established
- It requires vesting of a specific number of years
- Employers who sponsor plans must satisfy certain minimum funding requirements
- It regulates the manner in which benefits are paid
- It establishes the Pension Benefit Guaranty Corporation which provides coverage when the employer can no longer meet it's obligation.

Types of Retirement Plans

1. IRA-Based Plans
   -Payroll Deduction IRAs
   -(SEP Plans) Simplified Employee Pension 
   -(SIMPLE IRA Plans) Savings Incentive Match Plans
    for Employees
   -(SARSEP Plans) Salary Reduction Simplified
     Employee Pension

2. Profit-Sharing Plans
3. 401(k) Plans
4. Defined Benefit Plans
5. Money Purchase Plans
6. Employee Stock Ownership Plans (ESOPs)
7. Governmental Plans
8. 403(b) Plans
9. 457 Plans
10.409A Nonqualified Deferred Compensation Plans
11.Designated Roth Accounts
12.Automatic Enrollment

Who Can Participate In A Retirement Plan

Federal law allows employers to include certain groups of employees and exclude others from a retirement plan. For example, an employer may sponsor one plan for salaried employees and another for union employees. Part-time employees may be eligible if they work at least 1,000 hours per year, which is about 20 hours per week.

Visit the Department of Labor, Employee Benefits and Security Administration to learn more.

Eligible Employees

Federal law sets minimum requirements, but a plan may be more generous. Generally, a plan may require an employee to be at least 21 years old and to have a year of service with the company before the employee can participate in a plan. However, plans may allow employees to begin participation before reaching age 21 or completing one year of service

Setting up Retirement Plans

Resources

ERISA (Employee Retirement Income Security Act)

IRS Retirement Plan Guidelines

Type of Retirement Plans