Supported Plan Types
Types of plans administered include 401(k), KSOP, 414(h), 457, 403(b), prevailing wage, 1165(e), profit sharing, and non-qualified plans. In partnership with Harbridge Consulting Group, BPA also provides recordkeeping services for participant-directed cash balance plans. BPA supports the following plan types. Click on the name for a description of the plan type.
Traditional Profit Sharing Plan
A Profit Sharing Plan is a Defined Contribution plan to which the plan sponsor makes substantial and recurring, though generally discretionary, contributions. Employee contributions are usually optional. Amounts contributed to the plan are invested and accumulate (tax-free) for eventual distribution to participants or their beneficiaries either at retirement, after a fixed number of years, or upon the occurrence of some specified event. Unlike contributions to a pension plan, contributions to a profit sharing plan are usually tied to the existence of profits.
Integrated Profit Sharing Plan
Integration of Profit Sharing Plans is a process of correlating the benefits or contributions under a Plan with those under a governmental program. Plans may be integrated with various federal and state programs, the most common being federal Social Security benefits. Integration with Social Security is a cost saving method for the Employer under which benefits provided by the Social Security Act are not duplicated. The effect is to maximize contributions made effectively on behalf of higher-paid employees.
There are three basic integrated plans:
- Excess Plans - exclude from participation employees who earn less than a specified dollar amount in annual wages.
- Offset Plans - compute a gross benefit based on a formula geared to all pay, from which an amount can be deducted up to a permitted maximum on account of Social Security benefits or Employer-paid FICA contributions.
- Step-Rate Plans - provide x% up to a specified level of pay and x-plus % on pay above that specified level.
A 401(k) Plan is either a profit sharing or a stock bonus plan that gives employees an opportunity to save toward retirement on a before-tax basis. To encourage employees to utilize the 401(k) plan, many employers provide a "matching" contribution. Distributions from a 401(k) can be made only at prescribed times, including, but not limited to when the employee retires, dies or reaches the age of 59½.
An 1165(e) Plan is a retirement plan, similar to the 401(k) Plan that has been tax qualified under the Puerto Rico Tax Code. 1165(e) plans are usually sponsored by employers located in Puerto Rico for employees with Puerto Rico source income. Many of the same features and restrictions of 401(k) Plan apply to 1165(e) Plans however, they are subject to different contribution limits and nondiscrimination testing.
New Comparability Plans
The New Comparability Plan uses the process of cross testing to satisfy the discrimination rules. Cross testing is the process of converting contributions made today into their equivalent benefit accrual rates.
In designing a New Comparability Plan there are two methods:
- Super-Integrated Method - a Profit Sharing Plan would utilize an allocation formula that would be similar to an Integrated Profit Sharing Plan. For example, 5% of total compensation plus 20% of compensation in excess of $75,000.
- Classification Method - the Plan would define two ore more classifications of employees to divide participants into allocation groups. Each allocation group would receive a designated portion of the Employer's contribution for the year.
Section 403(b) Plan
403(b) Plans are tax-sheltered retirement arrangements maintained by public education organizations and certain tax-exempt entities. Contributions are often made through salary reduction, but employer contributions can also be made. Unlike 401(k) plans, 403(b) plans cannot invest in individual stocks. Instead, their choices are annuity and variable annuity contracts with insurance companies, custodial accounts made up of mutual funds or retirement income accounts for churches. As with a 401(k), distributions can be made only at prescribed times, and are generally limited to when the employee retires, dies or reaches the age of 59½.
Section 457 Plan
The effect of Code Section 457 is to shelter deferred compensation and income attributable to the deferred amounts from current taxation. To achieve this deferral of income, the plan must be maintained by an eligible employer and comply with the specific provisions of Code Section 457. Eligible employers are state governments or agencies or subdivisions thereof or any nongovernmental organizations exempt from income taxes, defined in Code Sections 501 through 528, and especially Code Section 501(c). Examples of these tax-exempt organizations are civic organizations and local associations of employees; religious, charitable, scientific, literary, and educational organizations; business leagues; certain credit unions; and mutual insurance funds. For years beginning after 2001, the limits on elective deferrals to a 401(k) plan will apply. Under a Section 457 plan for governmental employers, there are no discrimination rules, minimum vesting or participation standards, or disclosure requirements. These plans are non-qualified plans exempt from Title I of ERISA.
Non-Qualified Deferred Compensation Plan
Generally, a non-qualified plan is an agreement by an employer to certain of its employees to pay, at some future date, for services performed currently.
Non-qualified plans do not qualify for all of the special tax treatment afforded to qualified plans. Employers experience a loss of the current deduction for the employer contributions and they are taxed on the investment income of the trust maintained under the plan. Employees lose out on rollover opportunities and their benefits are subject to the general creditors of the employer.
Typically, non-qualified plans are designed to benefit key executives, a select group of management employees, and other employees whose benefits are limited by the IRS rules pertaining to qualified plans.
Employee Stock Ownership Plans (ESOP) (KSOP)
An employee stock ownership plan (ESOP) is a type of tax-qualified employee benefit plan in which most or all of the assets are invested in stock of the employer. Like profit sharing and 401(k) plans, which are governed by many of the same laws, an ESOP generally must include at least all full-time employees meeting certain age and service requirements. Generally, employees do not buy shares in an ESOP. Instead, the company contributes its own shares to the plan, contributes cash to buy its own stock (often from an existing owner), or, most commonly, has the plan borrow money to buy stock, with the company repaying the loan. All of these uses have significant tax benefits for the company, the employees, and the sellers. Employees gradually vest in their accounts and receive their benefits when they leave the company (although there may be distributions prior to that). Over 8 million employees in over 11,000 companies, mostly closely held, participate in ESOPs.
A (KSOP) is an Employee Stock Ownership Plan with a 401(k) Provision.
Target Benefit Plans
A Target Benefit Pension Plan is a cross between a Defined Benefit Plan and a Money Purchase Pension Plan. As with a Defined Benefit Plan, the annual contribution is determined by the amount needed to pay a projected retirement benefit (the target benefit) at the time of retirement. However, if the plan differs from the actuarial assumptions used, with a Target Benefit Pension Plan the employer does not have to increase or decrease the contribution. Instead, the benefit payable to the participant is increased or decreased.
Money Purchase Plans
A Money Purchase Plan is a Defined Contribution plan in which the company's contributions are mandatory and are usually based solely on each participant's compensation. Unlike most profit sharing plans in which there are generally no unfavorable consequences for the company if it fails to make a contribution, with a Money Purchase Plan, failure to make a contribution can result in the imposition of a penalty tax, even if the company has no profits. Retirement benefits are based on the amount in the participant's account at the time of retirement.
414(h) Plan (or Pick-up Plan)
A governmental pick-up plan is a plan under which the required employee contributions made to a plan are paid or "picked-up" by the employer; the contributions are made on a pretax basis. Such a design is similar to a 401(k) plan; however, the employee does not have the option to take the amount that is to be contributed in cash.
Only certain governmental entities are permitted to sponsor pick-up plans; such entities include a state or political subdivision of a state or an agency there under.
To be considered a governmental pick-up plan, the following requirements must be satisfied:
- The employer must specify that the contributions are being paid by the employer in lieu of contributions by the employee.
- The employee must not be given the option to take the contribution as current compensation.
Note: If a state has elected to be covered under the Social Security system, pick-up contributions are subject to FICA.
Pick-up is governed by Code Section 414(h), must be enacted by the state legislature or a local governing body, and is available on a prospective basis only. Picked-up contributions may be made directly by the employer but are usually made through salary reduction.
Section 414(h) salary reduction picked-up contributions are not defined as elective deferrals under Section 402(g)(3). Consequently, these contributions do not count against the Section 402(g)(1) or 402(g)(7) limits governing Section 403(b) elective deferrals.
Prevailing Wage Plans
Nonunion contractors performing work on Federal financed, and in some states, state financed jobs, are required to pay laborers and mechanics who work on site, a "prevailing wage." Typically, the prevailing wage includes both a cash and fringe component.
Contractors may satisfy the prevailing wage obligation by including both the wage and fringe supplement in the paycheck, or they may use a combination of cash and bona fide fringe benefits (including retirement benefits). The advantage of using a fringe benefit program is that the contractors avoid paying FICA, Medicare, Workers Compensation and General Liability Insurance on wages deposited into fringe benefit programs.
BPA has been administering Prevailing Wage Plans since 1994 and is a nationally recognized authority on the matter.
Individual Retirement Accounts
BPA record-keeps IRA accounts for other financial institutions, and for terminated participants with $5,000 or less in their qualified retirement plan account. For terminated participants, the forced distribution into a Stable Value fund reduces the administration expenses of the plan payable by the plan sponsor. In connection with this service, BPA also issues the annual Form 5498s.