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# 2030 - THE IMPORTANCE OF 401(K) PROGRAMS
The 401(k) salary reduction plan has probably received more media coverage than any other type of employee benefit plan. There is nothing magical about a 401(k) plan; however, it does have some very attractive features that could benefit you and your employees. Presently, these plans are the best savings vehicle available to our nation's work force for accumulating assets toward retirement on a tax-deferred basis. Consequently, there is consistent pressure on employers of all sizes to implement these plans to compliment their benefit programs.
In a nutshell, a 401(k) is a form of a profit sharing plan that allows a participant to choose how much of his income he wishes to defer into a tax-exempt trust. In your Association's sponsored plan, there is a matching contribution that the employer adds in order to create an incentive for one's employees to participate in the plan. Achieving high levels of participation is very important because of the discrimination tests that the government requires annually. These tests examine the percentage of the total pay that is saved by the highly compensated employees relative to that of the other employees in the dealership. Fortunately, high participation levels are relatively easy to accomplish with forthright communication and employer matching contributions.
The first step that you as an employer must take is to determine whether a 401(k) will fit into your overall employee benefit package. Once a commitment to the 401(k) is made, it is then necessary to formulate the design of your plan. The levels of contribution by the employee, the projected investment options that are available, and the level of matching contributions by you as the employer are all examples of the plan parameters that will be evaluated. The funds in the plan may be invested in a variety of investment accounts. Earnings on the funds in your 401(k) plan compound and appreciate on a tax deferred basis until distribution. Again, your experts at the Equipment Dealers Financial Group will work with you and your employees to help them evaluate their goals and objectives in order to design an investment strategy that is in conjunction with each individual's goals and risk tolerance.
401(k) plans are very popular with employees. I suspect that you may have been asked by your employees on one of several occasions, "Do you have a 401(k) plan?" or, "Are you planning on implementing one?" The 401(k) has indeed become the capital accumulation benefit of choice for the majority of our nation's workers. It is clear that employers who do not have such a plan, will find themselves at a disadvantage when competing for quality employees.
I am sure that many of you remember the tax reform act of 1986 and the impact that it had on defined benefit plans as well as limited partnerships. This act, however, did not at all diminish the interest in 401(k) plans. To the contrary, interest in 401(k) plans has increased considerably in the last 10 years because they offer greater advantages than the current individual retirement account.
From an Employer's Viewpoint, the Advantages of a 401(k) Plan Are as Follows:
From an Employee's Viewpoint the Advantages of a 401(k) Plan Are Also Considerable. They Are as Follows:
|
Capital Accumulation with a 401(k) Plan |
1 year | 10 years | 20 years | 30 years |
| Pre-Tax Savings | $2,000 | $20,000 | $40,000 | $60,000 |
| Co. Contrib. | $600 | $6,000 | $12,000 | $18,000 |
| Inv. Earnings | $72 | $12,713 | $70,290 | $157,042 |
| Total | $2,672 | $38,715 | $122,290 | $235,042 |
In designing a 401(k) plan for your dealership and your employees, your expert will work with you in the following areas to create the best possible plan given your goals and objectives. We will evaluate and review the following in the design of your plan.
In summary, whether your dealership is large or small, the addition of a 401(k) plan to your employee benefit program can provide considerable benefits _both to your employees, your dealership, and to you, as the employer. The key to success is designing a plan that meets both the objectives of your dealership as well as your employee's.
—March 1995, Oxford Financial Services
TAX LAW IMPACTS RETIREMENT PLANS
After a contentious session, Congress finally reached agreement with the President on a wide-ranging legislative package in early August. There were significant provisions that will affect income taxes and retirement plans contained in the Small Business Job Protection Act of 1996, the Health Insurance Portability and Accountability Act of 1996, and the Taxpayer Bill of Rights 2. In this article, we collectively refer to these acts as the "1996 Tax Law." What follows is a broad overview of these changes.
SIMPLE Retirement Plans: Small businesses get their own new simplified retirement plan under the 1996 tax law. Known as the Savings Incentive Match Plan for Employees (SIMPLE), this plan may be structured either as an IRA for each employee or as a 401(k) salary deferral plan. Employers currently without a plan and employing 100 or fewer employees earning at least $5,000 in compensation during the previous year are eligible to adopt a SIMPLE retirement plan. Briefly, when a SIMPLE plan is in IRA form, employees can elect to contribute up to $6,000 a year to their plan (adjusted annually for inflation). Employee elective contributions must generally be matched dollar-for-dollar by the employer -- up to 3% of the employee's compensation. Employers can opt, however, to elect a lower match. The lower match cannot be less than 1% and can only be used in no more than two of any five years. Contributions are deductible by the employer and are excludable from the employee's income.
A SIMPLE 401(k) plan is similar to a regular 401(k) plan in that employee pre-tax deferrals are allowed and the salary deferrals plus any investment earnings on the deferrals are not taxed until distributed. The nondiscrimination rules applicable to 401(k) plans are simplified for SIMPLE 401(k) plans, if certain conditions are met.
Lump Sum Distributions: Favorable five-year forward averaging will no longer be available for computing the taxes on lump-sum distributions from qualified retirement plans. This provision is effective for taxable years beginning after 1999.
Required Distributions: Effect*e for the years beginning after 1996, minimum distributions to a participant (other than a 5% owner) from a qualified retirement plan can be delayed until April 1 of the calendar year following the later of (1) the year the employee reaches age 70_1/2 or (2) the year the employee retires. Under this new law, a person still employed at age 70_1/2 will not have to begin receiving distributions from his or her employer's retirement plan until after he or she retires.
Minimum Participation Rules: In order to qualify for tax benefits, retirement plans must benefit no fewer than the lesser of (1) 50 employees or (2) 40% of all employees. The new tax law says that the minimum participation rule will apply only to a defined-benefit pension plan. That rule is also modified so that a defined-benefit plan must benefit no fewer than the lesser of (1) 50 employees or (2) the greater of 40% of all employees or two employees (one employee, if there is only one). These changes go into effect for years beginning after 1996.
401(k) Nondiscrimination Tests: The new law addresses the complexity of current nondiscrimination tests by providing that an employer may choose to perform the special 401(k) nondiscrimination tests using the actual deferral percentage (ADP) and the actual contribution percentage (ACP) for nonhighly compensated employees for the preceding or the current year.
Contributions and Benefits Limits: There are limits imposed by the law on contributions and benefits under qualified plans depending on the type of plan. For years beginning after 1997, the 1996 law extends the definition of "compensation" to include (1) elective deferrals to 401(k) plans and similar arrangements, (2) elective contributions to nonqualified deferred compensation plans of tax exempt employers and state and local governments, and (3) salary reduction contributions to a cafeteria plan.
Combined Plan Limit: Current law places an overall limit on contributions and benefits for employees who participate in both a defined-benefit pension plan and a defined-contribution plan. That combined plan limit is now repealed for limitation years beginning after 1999.
Excess Distributions Tax: The new tax law suspends the 15% excise tax on excess distributions from qualified retirement plans, tax-sheltered annuities, and IRAs for distributions received in 1997, 1998, and 1999.
Plan Amendments: The pension simplification provisions of the 1996 tax law require plan sponsors to make amendments to their plans by the first plan year beginning on or after January 1, 1998. The deadline for amending governmental plans is the first plan year beginning on or after January 1, 2000.
—December 1996, Millisor & Nobil, LLP
CHECK OUT YOUR ASSOCIATION SPONSORED 401(K) PLAN
Your Association endorses Tax Favored Benefits, Inc. for retirement plans. Tax Favored Benefits (TFB) is a full service employee benefits firm specializing in pension, profit sharing, 401(k) and deferred compensation plans. We build client relationships by providing high quality service and excellent funding options and now boast more than 700 corporate clients in over 20 states.
TFB is organized to provide retirement services and products in today's financial environment. They work with your other professional advisors to evaluate the complex issues surrounding retirement plan benefits and work to design a retirement plan program which most effectively meets your goals.
TFB can provide comprehensive and personalized retirement plan services:
Advantages for Association members
TFB provides:
Why should you offer a tax favored retirement plan?
Plan types to meet your needs
Why is proper plan design so important?
Managed money opportunities
If you elect to use TFB's investment instruments, your savings are professionally managed by nationally recognized investment companies. Here is a representative list of ones currently used:
If you currently have a retirement plan, what questions should you be asking?
What can TFB do for you?
TFB can provide all the services you need under one roof. It can provide design, administration, communication, education, and investment services. TFB works for the maximization of both the accumulation and retention of retirement funds. And if you already have a plan, TFB will thoroughly review it and provide an objective second opinion--at no cost to Association members.
For more information:
Contact the Association office: 800-606-6332
or
Tax Favored Benefits, Inc.
1-800-683-3440