ABACUS BENEFIT CONSULTANTS, INC.
FAQ’s
Q. What is a TPA (or Third Party Administrator)?
A. Employers who implement retirement plans for the exclusive benefit of their employees are known as “Plan Sponsors” under ERISA. A TPA is a company that administers employee benefit plans on behalf of Plan Sponsors. A TPA is independent from any investment company, products or services that relate to the employee retirement plans.
Q. What are the primary responsibilities of a TPA?
A. A TPA consults with Plan Sponsors to design a Plan that meets their business goals and employees’ retirement needs, prepares the Plan documents, drafts any amendments that may be requested or required thereafter, performs annual plan tests and files reports as required by the Federal Government and advises Plan Sponsors as necessary to ensure the Plan remains up-to-date with current retirement laws.
Q. Does Abacus provide investment advice as part of its TPA duties?
A. No. Abacus is not licensed to provide investment advice. As a TPA, Abacus is responsible for administering the Plan and coordinates with independent, financial advisors selected by the Plan Sponsor. It is the financial advisor who assists Plan Sponsor to select investment vehicles for the Plan’s assets and educate employees regarding the benefits of saving for retirement and maintaining diversified investments.
Q. How does Abacus determine what Plan is best for my company?
A. Abacus first asks the employer what is the goal in implementing a Plan. Naturally, employers’ goals vary and may include remaining competitive with other businesses that offer retirement benefits, assisting employees save for retirement, and/or enabling employers to maximize their own retirement benefits. In developing a Plan, we also consider the company’s history, employee demographics, and the company’s financial resources and need for flexibility.
Q. Why should I appoint a TPA for my Plan?
A. A TPA is able to assist a Plan Sponsor to fulfill its fiduciary obligations, affectively administer the Plan in accordance with applicable regulations, and minimize potential compliance issues.
Q. What are some advantages of implementing a qualified retirement plan?
A. There are numerous benefits for both employers and employees, which include:
Employer Benefits
Employer contributions are 100% tax-deductible.
Implementation costs are 100% tax deductible.
Administrative costs to maintain the plan are 100% deductible.
Tax credits and other incentives for starting a plan may reduce costs.
Favorable Plan design for selected employees
Federal Tax Credit of $500.00 for each of the first three years of the plan (provided you have less than 100 employees who meet the threshold salary).
A retirement plan may attract more qualified employees, retain employees and thereby reduce the cost of employee turn-over.
Employers may maximize their own retirement savings options.
Employee Benefits
Employees have the opportunity to save for their retirement.
Employee contributions can reduce their current taxable income.
Employees may contribute on a pre-tax basis or after-tax (Roth) basis according to their specific needs.
Assets in the plan grow on a tax-deferred basis.
Compounding interest over time allows small, regular contributions to grow to significant retirement savings.
Contributions are easy to make through a payroll deduction.
Vested retirement assets are portable from one employer to another.
Under certain conditions participant account balances are not subject to the creditor claims under federal bankruptcy law.
Q. Must an employer always provide for a matching contribution?
A. No. Abacus is able to develop a customized Plan that permits the employer to elect whether to provide a matching contribution either on a year-to-year basis, or that includes no employer contribution entirely.
Q. Standard 401(k) v. ROTH 401(k), what is the difference?
A. Traditionally, employees contribute to their 401(k) accounts on a pre-tax basis through payroll deductions from their gross income each pay period. That is, contributions are made before taxes have been deducted, which has the advantage of lowering the employee’s taxable income during the Plan year in which the contributions are made. Contributions are ultimately taxed upon withdrawal and based upon the employee’s then-current tax bracket, which is often lower since most withdrawals tend to be made following retirement.
In 2006, the Roth 401(k) Plan was created. It permits an employee to contribute after-tax wages to his/her retirement account. One advantage is that a Roth 401(k) is available to high-income individuals who have been precluded from contributing to a Roth IRA because of the income restrictions.
Q. What is the maximum amount that I may contribute to my 401(k)?
A. The maximum dollar amount an employee may contribute to a 401(k) Plan is determined annually by the IRS. If the employee is age 50 or older in the current plan year he or she has the option to contribute an additional “catch-up” contribution in a dollar amount that is also determined annually by the IRS. The maximum contribution and catch-up amounts for the last four years are as follows:
Year Employee Contribution Employee Catch-Up
2009 $16,500 $5,500
2010 $16,500 $5,500
2011 $16,500 $5,500
2012 $17,000 $5,500
Q. May a Plan participant borrow from the contributions made to their retirement account?
A. A qualified Plan may, but is not required, to provide for loans. The maximum amount that the Plan may permit as a loan is (1) the greater of $10,000 or 50% of the participant’s vested account balance, or (2) $50,000, whichever is less, although the Plan may set lower maximum amounts. Any loan must be repaid within 5 years (unless it is used to purchase a principal resident as permitted by the Plan), and payments must be made in substantially equal payments that include principal and interest and that are paid at least quarterly.
Q. What is a hardship distribution?
A. A retirement Plan may, but is not required to, provide for hardship distribution. A hardship distribution permits participants to withdraw funds from the elective contribution and/or vested employer contribution made to their retirement account in the event of an “immediate and heavy financial need,” such as medical or funeral expenses and/or as defined by the Internal Revenue Code. If a Plan provides for hardship distributions, it must provide the specific criteria used to make the determination of hardship. After an employee receives a hardship distribution, the employee will be prohibited contributing to the Plan for at least 6 months after receipt of the hardship distribution. In addition, hardship distributions are includible in gross income (unless they consist of designated Roth contributions) and may be subject to an additional tax on early distributions of elective contributions. Unlike loans, hardship distributions are need not be repaid to the Plan.
Q. What is a Form 5500?
A. A Form 5500 is an Annual Return/Report of Employee Benefit Plan that must be filed electronically each year on behalf of a plan sponsor and which reports the plan’s financial condition, investments and operations. Abacus provides a signature-ready annual Form 5500 for electronic filing through our secure portal, which is one of the many services Abacus provides to its clients.
Q. When should I sign my new Plan document or amendment?
A. All plan documents should be signed promptly upon receipt and dated with a current date. The Plan is considered formally adopted the date it is executed.
Q. When does the qualified plan have to be restated?
A. The IRS requires restatements to ensure that a qualified plan is in compliance with all regulations and legislation and has adopted all interim amendments as required by law. The IRS has enacted a 5-year restatement cycle for individually designed plans and a 6-year cycle for pre-approved plans. To minimize the expense and inconvenience to our clients, Abacus strives to incorporate as many amendments as possible at the same time, and to include such amendments in the Plan’s most recent restatement.