Our firm is positioned to advise employers on various employee benefit matters including ERISA and pension plan issues, employee stock ownership plans (ESOPS), qualified and non-qualified executive compensation, fiduciary responsibilities, retirement plan design and compliance and health and welfare benefit plans. In these regards we focus on the needs of the specific client and particular business situation, recommending and designing plans and arrangements accordingly, one of the ultimate aims of which is to retain talented employees and executives in place and promoting a productive workplace.
Frequently Asked Questions
Employers regularly provide their employees with a variety of benefits in addition to current wages and salaries. These benefits are commonly called “Fringe Benefits”. Fringe Benefits include all types and sizes of benefits such as employee discounts, club memberships, employer provided meals, educational assistance, as well as retirement plans. Under the general tax rules, employees are taxable on the fair market value of Fringe Benefits and employers may deduct their benefit costs every year unless a specific tax statute provides otherwise.
[Internal Revenue Code Section 61A defines taxable income to employees and includes “compensation for services, including … fringe benefit”. Internal Revenue Code Section 162A permits employers a deduction for reasonable “salaries and other compensation for personal services”. Finally, Internal Revenue Code Section 132 excludes certain types of Fringe Benefits from taxation.] With all that being said “Employee Benefits” are a special subset or sub-category of Fringe Benefits. There is no single definition for this term, but it typically refers to employer-sponsored plans that are subject to the Employee Retirement Income Security Act of 1974 (“ERISA”) and has special tax rules.
There are three major laws, namely the Internal Revenue Code (“IRC” or the “Code”) and the Employee Retirement Income Security Act of 1974 (“ERISA”), and the Age Discrimination in Employment Act (“ADA”). Don’t forget the Social Security Act, which provides benefits such as retirement, disability, health and life insurance that resemble Employee Benefits. [Social Security however, is not considered to be an Employee Benefit Plan, it is instead an entitlement program that is mandatory, nearly universal federally regulated and financed by payroll (FICA) taxes on employers and employees.
There are five major types of plans, namely: Defined Benefit (“DB”) Plan; Defined Contribution (“DC”) Plan; Cash Balance Plan; Individual Retirement Accounts (“IRAs”); and Keogh Plans as well Simplified Retirement Plans (“SEPs”).
- A Defined Benefit (“DB”) Plan is the so called traditional workplace pension historically paid in the form of an annuity (at retirement). The benefit is based on a formula typically involving salary and length of service. Private sector pensions typically are financed entirely by the employer and are not “portable” from job to job.
- By comparison, a Defined Contribution (“DC”) Plan guarantees no ultimate benefit at all; rather, it is financed with contributions from the employee and the employer. The employee generally controls how the contributions are invested (within a limited range of options), which gives him or her more control over the funds, but also more risks. These benefits usually can be “rolled over” upon leaving a job. There are various types of DC Plans, the most common and well known being the 401(k) Plan. DC Plans (especially 401(k)s) by far have become the most popular of employer sponsored plans in recent years.
- Cash Balance Plans combine elements of both Defined Benefit and Defined Contribution Plans, but do so in a way that gives the employer a more precise projection of future obligations. Typically, an employer contributes a defined amount annually based on compensation and guarantees that the account will grow by a fixed percentage annually. A worker/employee reaching retirement age can typically take the accrued amount either as a lump sum or as an annuity. Converting existing Defined Benefit Plans into Cash Balance Plans has caused some very thorny legal questions about how to fairly deal with senior employees.
- Individual Retirement Accounts (IRAs) allow a person to set aside and invest a contribution each year in an individual account. There are several different types of IRAs and in recent years Congress has expanded them for non-retirement purposes (such as education). IRAs are typically used as a holding vehicle for money that is rolled over from another retirement plan upon a job change, such as a 401(k).
- Keogh Plans are tax deferred retirement accounts for self-employed workers or persons employed by unincorporated businesses.
Yes, the employee can save on a pretax basis through a traditional IRA which enables him or her to contribute up to $5,500.00 (currently) as compared to up to $18,000.00 currently through an employer-sponsored 401(k) plan.