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Employer Sponsored Retirement Plans

Planning for retirement can be confusing, but it is worth the extra effort, especially when retirement plans are sponsored by your employer. When companies offer employer-sponsored retirement plans, potential employees often see this as an enticing benefit, and further incentive to join the company. In general, most companies provide qualified retirement plans that offer tax benefits for their employees to take advantage of. To help you understand your options, we’ve gathered the basics on common qualified retirement plans that employers typically offer.

Plans Available (link to each)

  • 401(k)
  • Roth 401(k)
  • 403(b)
  • Savings Incentive Match Plan for Employees (SIMPLE) IRAs
  • Simplified Employee Pension (SEP)

401(k)

A 401(k) plan is named after section 401(k) in the Internal Revenue Code. With this plan, employees have the option to elect a certain tax-deferred dollar amount or percentage to be deducted from their salary and placed into the retirement fund. Employees may contribute as much to their 401(K) as they would like, so long as they stay within the annual contributions limits that are set by the IRS. As added incentive to participate, many employers offer an employer-matching contribution feature. For example, an employer may offer a company match program of 50 cents for every dollar contributed, up to 6 percent of the total salary deferment. In other words, the employer will contribute a maximum of 3 percent of the employee’s total salary. In the event the employee elects to skip participation in the 401(k), the employer does not have to contribute to the fund. Employee contributions to the 401(k) are 100 percent vested because the money that is contributed to the plan is money that the employees were originally entitled to before making contribution elections. In many cases, an employee’s entitlement to employer contributions may be subject to a vesting schedule that is determined by the employer. The longer an employee is with the company, the more vested they become in employer contributions. Funds from a 401(k) account are not available for withdrawal by the employee until he or she reaches retirement or encounters financial hardship. If a participant wishes to withdraw from his or her 401(k) account early, he or she will be subject to a significant tax penalty of 10 percent.

Roth 401(k)

The primary difference between a Roth 401(k) and a traditional 401(k) is that, in a Roth 401(k), employee contributions are made after taxes, so when employees withdraw funds at the time of retirement, they will not be taxed. In addition, Roth 401(k) plans are not subject to required minimum distributions (RMD), the annual withdrawals that one must take when they reach age 70 ½. While many employers may choose to offer their employees the ability to make Roth contributions in addition to traditional contributions, they don’t necessarily have to offer a Roth contribution plan. While it is possible to make sole contributions to a traditional or Roth 401(k), an employee may also elect to make both traditional and Roth contributions to his or her 401(k) if both contribution types are offered. Like the traditional 401(k), employer-matching contributions are a common feature of Roth 401(k) plans. However, even if the match is for Roth contributions, employer contributions are always of traditional 401(k) nature in that they are made with pre-tax dollars. Employer contributions are kept in a separate account that is taxed upon withdrawal.

403(b)

This plan is nearly identical to a 401(k). For starters, a 403(b) plan allows employees to make contributions to their account before taxes. Like the 401(k), employees are allowed to contribute as much as they would like to their 403(b), so long as they stay within the annual contribution limit. Also, in some cases, a Roth 403(b) plan is available for after-tax contributions, but no taxation on withdrawals at the time of retirement. 403(b) plans are similar to 401(k) plans in that employers commonly offer a matching contribution program. Also, similar to a 401(k), employees may invest their funds from a 403(b) plan into different investing vehicles. However, 403(b) plans may only be funded by mutual funds and/or annuities. The main difference between a 403(b) and 401(k) plan is that 403(b) retirement plans may only be used by tax-exempt organizations such as charitable, religious and educational establishments.

403(b) plans offer an exclusive feature that other plans do not: the 15-Year Rule. If an employee’s past deferrals did not reach the contribution limit, the 15-Year Rule allows employees with at least 15 full years of service with the same company to make additional contributions to their plan of up to $3,000 more than the contribution limit.

Another significant difference between the 403(b) and 401(k) retirement plan is that employers of a 403(b) plan may also offer contributions to a 403(b) retirement plan on behalf of former employees for up to five years after an employee’s departure from the company. Former employees are immediately vested in these funds.

Savings Incentive Match Plan for Employees (SIMPLE) IRA

A SIMPLE IRA is another retirement plan that allows employees to defer a portion of their salary into a retirement fund. SIMPLE IRAs are available to any small business, and employers who offer a SIMPLE IRA plan cannot offer any other form of retirement plan. Employers are required to offer a matching contribution plan of either up to 3 percent of income the employee elects to contribute, or 2 percent of income if the employee elects to decline contribution to his or her own account. In addition, employees are 100 percent vested in their funds at all times. Participants who wish to withdraw funds from their SIMPLE IRA before age 59 ½ may be subject to a 10 percent tax penalty. If a participant makes a withdrawal within the first two years of establishing the plan, the 10 percent additional tax is increased to 25 percent. However, after a SIMPLE IRA plan has been established for at least two years, funds in a SIMPLE IRA may be transferred tax-free to another tax-deferred account, such as an IRA.

Simplified Employee Pension (SEP)

SEPs are available to any business of any size. These differ significantly from other defined-contribution plans discussed above in that they only allow contributions from the employer. Though employees do not have the ability to contribute to their SEP plan, they do have control over which options the funds are invested in. Contributions in 2012 are limited to the lesser amount of either 25 percent of the employee’s salary or $50,000. Participants who wish to withdraw funds from their SEP plan before retirement may be subject to a 10 percent tax penalty. Companies who choose to use this plan often do so because there are very low administrative costs, they are easy to set up and operate, and they offer flexibility with annual contributions if cash flow is an issue for the company. The contribution flexibility allows companies who often fluctuate between good years and bad years to change the contribution amounts to their employees annually, according to their cash flow.


Investment Advisory Services offered through O.N. Investment Management Company. Securities offered through the O.N. Equity Sales Company. Member FINRA/SIPC. One Financial Way, Cincinnati, Ohio 45242. 513/794-6794. HollandStivers & Associates, LLC is independent of the O.N. Equity Sales Company. Our representatives are licensed to sell health and life insurance in Alabama, Illinois, Kentucky, Missouri, Ohio, Tennessee, and Texas. Our representatives are licensed to sell securities in Illinois, Indiana, Kentucky, Missouri, Mississippi, North Carolina, and Tennessee. Early withdrawals may be subject to surrender charges (contingent deferred sales charges.) Withdrawals may be subject to ordinary income tax and, if taken prior to age 59 ½, a 10 percent federal tax penalty may apply. Fixed annuities are not insured or guaranteed by the FDIC or any other government agency. Variable annuities and Mutual Funds are sold by prospectuses which contain more complete information including investment objectives, strategies, risk factors, fees, contingent deferred sales charges and other costs that may apply. Please read the prospectuses carefully before investing. Past performance is no guarantee of future results. Variable annuities are long-term investment vehicles designed for retirement purposes. Early withdrawals or surrender charges may be subject to surrender charges (contingent deferred sales charges.) Withdrawals may be subject to ordinary income tax and if taken prior to age 59 ½, a 10 percent federal tax penalty may apply. Withdrawals reduce the death benefit, cash surrender value and any living benefit amount. Variable annuities are not insured or guaranteed by the FDIC or any other government agency and are subject to investment risks, including possible loss of principal investment. Diversification does not assure or guarantee better performance and cannot eliminate the risk of investment losses. Asset allocation does not assure a gain and does not protect against a loss in declining markets.