Retirement Plans
money set aside for retirement
Defined Benefit Pension Plans
Often referred to as traditional retirement plans
used to be the most... [Show More] common type of employer-sponsored retirement plans until the 2000s (when uncle sam required companies to account for any unfunded pension liability - estimated pension benefits to be paid into the future - on their current balance sheets)
What types of plans are becoming rare?
defined benefit pension plans
they are being replaced by defined contribution plans
Where does the responsibility rest with defined benefit pension plans?
the employer
what is a defined benefit pension plan?
the employee will receive a fixed monthly benefit at retirement and will not be responsible to make any contributions to the plan
How are employer contributions calculated in a defined benefit pension plan?
Contributions will be supplied by the employer, who will base the monthly benefit on a formula using an average annual income and years of service. All investment decisions will be made by the employer, not the employee. And since the plan is entirely administered by the employer, the employee will have no control over the funds upon reaching retirement age and no guarantees that the money will actually be there at retirement.
How does the federal government guarantee pension funds for DBPPs?
through an insurance program paid for by the employer - PBGC Pension Benefits Guarantee Corp - but in the case of default, retirees don't necessarily receive all the money to which they are entitled
Why doesnt the PBGC guarantee all funds to retirees?
PBGC's single-employer insurance program pays pension benefits up to the maximum guaranteed benefit set by law to participants who retire at 65 ($67,295 a year as of 2018). The benefits payable to insured retirees who start their benefits at ages other than 65 or elect survivor coverage are adjusted to be equivalent in value. The PBGC currently has a deficit of > $51B. Yes, that's BILLION
Defined Contribution Plan
Usually 401k plans with not for profit employers
What is the most common type of employer sponsored retirement today?
Defined Contribution Plans
Who offers DCPs
This is the most common employer-sponsored retirement plan today. They are primarily offered by moderate to large, for-profit businesses. (Generally, businesses with 30-50 employees or larger). It is a defined contribution plan funded primarily by the employee but often comes with at least a partial employer match. (These matching funds should be maximized whenever possible.)
How do DCPs work?
The employee chooses which investments in the 401(k) plan to put his or her funds into from a fixed set of choices inside the plan and will have complete control over the money upon reaching retirement.
In addition, the contributions are tax-deductible in the year they are made. Investment earnings will accumulate on a tax-deferred basis.
What happens when an employee retires with a DCP?
complete control
In addition, the contributions are tax-deductible in the year they are made. Investment earnings will accumulate on a tax-deferred basis. Once the employee retires and begins taking distributions, those distributions will be taxable as ordinary income at the tax rate in effect at the time of the withdrawal.
What happens if someone pulls money out of a DCP early?
Should the employee withdraw the funds prior to retirement, those funds can be rolled over either into a traditional IRA or into the 401(k) plan of another employer — without incurring taxes or early withdrawal penalties. Funds can also be withdrawn or borrowed to make a down-payment on a first home, for a medical or financial emergency without a penalty (e.g., Covid-19). Simple loans from the plan, with some limitations, can also be taken out for personal reasons, but must be paid back to avoid penalties. Any funds withdrawn before retirement, but not rolled over into another qualified plan, will be subject to ordinary income taxes as well as a 10% early withdrawal penalty.
There are special cases in which these funds can be withdrawn early without penalties.
Where does the responsibilty rest for DCPs?
Ultimately rests with the employee
What are the annual contribution limits to DCPs?
Annual contributions are limited to $19,500 for 2020. If the employee is age 50 or older, there is a catch-up provision allowing an additional contribution of $6,500 (total of $26,000) for 2020.
Employee Stock Purchase Plan (ESPP or ESOP)
Allows employees to purchase stock in their employer's company, usually as some type of discount
Most employers allow employees to take payroll deductions to purchase stock at some type of discount and avoid brokerage commissions and record-keeping fees
Examples for Employee Stock Purchase Plans:
"You can contribute from 1% to 100% of your eligible pay in whole percentages or you can contribute a flat dollar amount each pay period ranging from $25 to a maximum of $15,000. The maximum amount you can invest in a calendar year is $25,000.
The value of the discount is income taxable to whom?
The employee (you)
Shares must be held in your account for a period of six consecutive months before they can be sold
The big decisions on what type of health insurance coverage to buy revolve around:
Whom to cover?
Level of coverage?
Cost of premiums
Whom to cover on health insurance?
Employee, add spouse, add dependent children (or others)
Level of health insurance coverage?
Lower or higher deductibles? what level of copays? Drug plans? HSA option?
Cost of premiums for health insurance:
a function of the decisions made about who to cover and the level of coverages
Deductible:
The "first dollars" paid during any episode of care.
Example of health insurance deductible:
A visit to the emergency room which cost $700 with a policy requiring a $200 deductible. You pay $200 at the visit and your insurance pays the remaining $500. Deductibles are designed to increase the likelihood that the insured will only seek care when needed. Many policies have much smaller deductibles (co-pays) for preventive care ($0) and doctor office visits ($10).
Telemedicine visits often have no co-pays or deductibles.
Co-Insurance:
After a deductible has been paid, shares the cost of an episode of care between the insurance company and the insured.
Co-Insurance example:
Same ER example with $700 bill and $200 deductible, but now with 70/30 co-pay. (After deductible is paid, insurance company will cover 70% of remaining bill, while insured will pay 30% of residual amount)
Health Saving Account (HSA) Option:
a type of savings account that lets you set aside pre-tax dollars to pay for qualified medical expenses only if you have a High Deductible Health Plan (HDHP)
Qualified expenses for HSAs:
These qualified expenses include deductibles, copayments, coinsurance, and some other expenses like eyeglasses, medications, durable medical equipment, facility and doctor's fees. HSA funds generally may not be used to pay premiums.
What are the HSA contribution limits?
For 2019, if you have an HDHP, you can contribute up to $3,500 for self-only coverage and up to $7,000 for family coverage into an HSA. For 2020, if you have an HDHP, you can contribute up to $3,550 for self-only coverage and up to $7,100 for family coverage into an HSA. HSA funds roll over year to year if you don't spend them. An HSA may earn interest or other earnings, which are not taxable.
After age 65, how do HSA funds function?
Like an IRA and are no longer restricted to qualified medical expenses, but can be used for any purpose
Telemedicine Visits:
somewhat limited in their scope, BUT are here to stay and will be "the wave of the future." Insurers are exploring the best ways to expand the use of telemedicine and states are looking at the best way to monitor and control them.
Flexible Spending Accounts (FSA):
Many employers are offering FSAs as a benefit to employees. These are funded by the employee with pre-tax dollars - thus, money put into the FSA will lower the employee's Adjusted Gross Income (AGI) for tax purposes.
Three types of FSAs:
Health FSA
Limited Purpose FSA
Dependent Care FSA
Health FSAs:
may be used for a wide range of out of pocket healthcare expenses, including copayments, deductibles, most dental and vision services, prescriptions and more
2019 Annual Limit - 2700
2020 Annual Limit - 2750
Limited Purpose FSAs:
are coupled with a health savings account and may be used for vision and dental expenses only
2019 Annual Limit - 2700
2020 Annual Limit - 2750
Dependent Care FSAs:
Dependent Care Assistant Plans
Will stay at the $5,000 annual limit
What happens to unused FSA contributions?
They are forfeited to the employer at the end of the year
Hence the importance of the employee of accurately estimating the need at the time of deferral.
Disability Insurance:
Employers may offer both short- and long-term disability insurance plan, usually purchased by the employee with after-tax dollars.
Short Term Disability (STD):
"If you are unable to work due to a non-work-related illness or injury, the group Short-Term Disability (STD) plan offers you an income replacement benefit equal to 60% of your weekly base salary up to a maximum weekly benefit of $2,500 for a maximum period of 11weeks.
When do benefits begin on short term disability?
Benefits begin after a 14-day elimination period. You and the Company share equally in the cost of coverage. If you enroll, your share of the premiums will be conveniently deducted from your paycheck on an after-tax basis. Under current tax laws, if you receive benefits from the STD plan, 50% of your benefit will be taxable because 50% of the premium is paid by the Company. (By IRS code, money received from a disability policy is taxable as ordinary income to the extent to which the employee paid the premiums. So, if you pay the premiums yourself, there is no tax on the payments. If your employer pays the premium, 100% of the money you receive will be taxed as ordinary income to you.)
In which states are there mandatory short term benefits required via state programs?
California
Hawaii
New Jersey
New York
Puerto Rico
Rhode Island
Long Term Disability (LTD):
All LTD policies have common features, but the actual numbers may differ: Elimination period, monthly benefit paid and time limit on benefits
Elimination Period:
time calculated from onset of total disability to first payment received (usually 90 days but can be set for shorter or longer periods. Policies with longer elimination periods are cheaper.)
Monthly Benefit Paid:
percent of current salary paid to the disabled worker each month, after the Elimination period. Usually stated as a percent of monthly income (50-70% are common levels) but can also be a fixed amount of money (e.g., $5,000 per month). There is usually a maximum monthly benefit level allowed, particularly for high-income employees. The lower the benefit paid, the cheaper the insurance. Remember, whatever portion of the premium is paid by the employer is taxable to the employee as ordinary income, thus lowering the amount of money you ultimately receive each month.
Time limit on benefits:
Benefit payments cease at the onset of Social Security, usually age 65. There can be a phase-out of benefits when disability starts between age 62-65 which may extend benefits past age 65. The reason is no mystery; if an employee has paid over a specified amount of total premium dollars into the policy over many years, the insurance company must pay the employee back a proportion of the total premiums received - much like a Whole Life Insurance policy. The time needed to refund this amount of premiums, may extend past age 65.
Life Insurance:
May be purchased or provided for employee, spouse, dependents and may include add-ons like AD&D Insurance (Accidental death and dismemberment), long term care (LTC), identity theft protection policies, etc.
Individual Coverage HRA (ICHRA):
Works well for employers of all sizes, especially because they are not restricted based on employee count like the QSEHRA
There are no contribution limits and businesses can offer different allowance amounts based on 11 employee classes
This is only available to employees enrolled in individual health insurance; employees enrolled in a spouse's group health insurance policy can't participate
The qualified small employer HRA (QSEHRA)
Increasingly popular option created through bipartisan legislation in december 2016
businesses with fewer than 50 employees offer employees a monthly allowance of tax-free money
employees then enroll in an individual health insurance policy and the business reimburses them up to their allowance amount
additionally, employees can use the QSEHRA to get reimbursements for eligible out of pocket expenses - this allows businesses to keep control over their budget while offering a meaningful benefit to their employees
What happens with QSEHRAs?
All reimbursements are free of payroll tax for t [Show Less]
