Chapter 6: Employer Retirement Plans

Employment Plans
     Some names used on these plans include 401(k) or CODA, SEP (sometimes called a SEP-IRA), Profit Sharing, Thrift Savings Plan, Salary Reduction Plan, ESOP and PAYSOP, Defined Benefit Plans, TSA/TSCA, Keogh or HR 10, and Money Purchase.
     TRA '86 simplified the various tax codes to have these plans better coordinate and more closely resemble one another. It is no longer "highly advantageous" to have as many plans as possible to allow sheltering of as many dollars as possible (since adding a dollar to one plan now generally subtracts from that which you might have added to another). There are contribution limits to each and there is a limit to the ammount that can be put aside using multiple plans: the limit is the same as if the money was put in one single "qualified" account.
     A $10,500 ('98) contribution limit per person per year is in effect for the 401(k), and it must coordinate with any other employee voluntary deductions. 403 (b) has a $10,000 limit. Defined-contribution limit is $30,000 and the ceiling on Pension Plan benefits is $160,000 ('98). For 457 plans, the '98 limit is $8,000 or 1/3rd of compensation, which ever is lower. the SIMPLE plan has a $6,000 ceiling. For the company's share of a SEP plan, the minimum compensation is $400.
     Even the deductibility of an IRA is limited to $2,000 up to certain earning limits per year per person : Full $2,000 deduction is allowed up to earnings of $40,000 for a couple (single $25,000). Deductions phase out above those levels and completely disappear at $50,000 for a couple. ('98 change: BOTH spouses may now make a $2,000 contribution even if only one had employment income).

Tax Qualification
There are two basic types of plans:
--"Qualified" - or "pre-tax" plans (which you haven't paid taxes on yet). Examples: 403(b), 401(k), IRAs, 415 defined contribution plans, 415 defined benefit plans, SEP-IRA, 457, SIMPLE-IRA, and KEOGH (HR-10).
   --"Non-Qualified" or "voluntary", "thrift", "post-tax" plans (which you have paid taxes on your portion of the principal, but not on the earnings nor any "matching" by your employer). Example: "Thrift Plans," Stock Options, and other plans which tax the principle before placing the assets in the tax-deffered features of the plan. The growth (interest, yield, or other measurement of gain) of this plan WILL be taxed upon receipt. Like the above "qualified plans," money must begin to be withdrawn (about 10% per year) on or before a person turns 70 1/2 or become subject to a very heavy penalty (50%) against the money which should have be withdrawn that tax year.
       The 1997 law allows postponment of required pay-outs from a company retirement plan until the year after you retire). And, since 1998, a new hybrid:
--A new type of plan (as of 1998), called a "ROTH IRA," is a mixture of the main two: you pay taxes on your work earnings, then, taking that already taxed principle, you pay into a new "ROTH IRA" with a deposit of no more than $2,000 (each person, each year). The principle has already been taxed, so it comes out income tax free, but SO DOES the INTEREST earned inside the account if you follow certain rules (Basically you have to leave the money in for at least 2 years plus some other requirements that are not totally clear yet from the IRS.
     The "Qualified" type and the tax-deferred earnings and employer matching of the "non-Qualified" type may be "rolled-over" to an IRA when you cease employment in many cases. This gives you investment choice, rather than leaving that choice with your employer.
   The "non-qualified" money has already been taxed. It may be removed as principle without having taxes due. Of course, it cannot be (nor would you want to) "rolled over" into an IRA.
    The ROTH IRA can receive money from an IRA roll-over (of course paying all due taxes) and the future earnings will come out tax-free as long as the money stays in the ROTH for 2+ years). This idea is so new that it is hard to calculate the effect. It is expected that an IRA coverted to a ROTH would probably NOT be a good idea for retirees.

Profit Sharing Plans
   One of the most popular contribution plan is the "Profit Sharing plan." If any employer declares a profit in a given year, then the formula for the contribution is triggered (usually from 0-15% of "compensation"), and that amount is credited to the employee's account subject to restrictions like a vesting schedule.
    The vesting schedule is designed to reward worker's longevity with the company. Recent tax law changes have made it difficult for a company to have a vesting schedule longer than seven years.
   Pension credits may no longer be stopped for most employees who continue working after January 1, 1988, and who are over the age of 65. Workers over the age of 60 can no longer be excluded from a pension plan based only age.

Voluntary Plans
Subject to IRS participation guidelines, employers may offer voluntary-contribution plans to the employee. In some plans, like the TSA or 401(k) plans, the employee's contribution is pre-tax ("qualified) money. The employer may or may not "match" or contribute funds in voluntary plans. If they do, however, the employer's portion is "pre-tax" money.
Due to the nature of voluntary plans, with the employee contributing, his part is "fully vested" at all times. He has the right, usually, to "roll" this money out upon leaving the employment (even if not yet retirement age). Usually the employee also has the right to make the investment decision, within the options arranged by the employer, concerning the employee-contributed funds.

Upon Retirement
    No matter what the plan used, the ultimate goal is to remove funds for retirement income. It has already been mentioned that some people "roll out" the assets to gain further control.
   Many people, however, do not "roll" their retirement money (indeed, Government workers usually can not). Instead the company "annuitizes" the money to provide a life-time guaranteed income. There maybe cost-of-living features built in.
   Once the "annuitization" choice has been made, it may NOT be changed. You should review the choice you originally made to find out what may happen upon your death to any funds which may remain."Annuity" choices usually include:
-"Joint Life" The pay-out begins upon retirement of the worker at a stated monthly rate. If his spouse is alive at his death, the pay-out continues for the balance of the spouse's life. No benefits are left when both are deceased.  The amount that is paid to the survivor is usually not the full amount the worker received. Typically the monthly check will be 50% or 75% of the former amount received.
-"Life Only" The pay-out is slightly larger per month than that of "Joint Life" above. However, upon the demise of the worker, no further payments are made.
-"Life with refund" The payout is similar to that of "Life only", but if the worker did not receive the full principal (the amount in his account upon his retirement) over the years of his life, the balance is paid to his named beneficiary.
-"Life with a period certain" The pay-out here is similar to "Joint Life", but the beneficiary need not be a spouse. In this case, a period of time is chosen (5, 10, 15 or 20 years). If the worker dies within that chosen time frame, the full monthly payment goes to the named beneficiary until the time has expired (counting from the 1st check the worker received). Payments continue to the worker no matter how long he lives, but ceases upon his death if he outlived the period chosen.

Continued Employment Option
About 17% of the income received by those over 65 comes from employment earnings, according to the Social Security Administration. According to "Modern Maturity" (Dec 1988), those who responded to their questionnaire about a "second career" after retirement (median age: 60) said that:
      67% had "no problems" with their work
     15% found some "age discrimination" at work
     13% had trouble finding work
     9% found problems with the pay they received
     7% found problems with Social Security earning limitations
     13% had "other" misc. problems

Dept of Labor: The Effect of Job Mobility on Pension Benefits
This 1988 study shows losses that "varied widely" for 59% of workers making a job shift (or loss of employment). The affected persons usually had "defined benefit plans" which "froze benefits" at the level at which the worker was upon leaving.
-Nearly 1/3rd experienced losses of benefits of 1-19%
-Another 1/3rd had losses of 20-20%
-The last 1/3rd experienced 30-49% losses
-The average benefit loss per employee was 23%
-Another source of losses were attributed to employees who "cash out" and spend the current value of benefits before retirement.