Unit 1: Why Do Employers Establish Qualified Plans? Flashcards
TERM: Social Security
The commonly used term for the federal Old-Age, Survivors, and Disability Insurance (OASDI) program and is administered by the Social Security Administration (SSA). The Social Security Act was passed in 1935, and the existing version of the Act, as amended, encompasses several social welfare and social insurance programs, including federal sponsored retirement benefits.
What 3 things should be considered when planning for retirement?
- Retirement can last 30 years or more.
- A retiree needs 80% or more of their current income to retire comfortably
- The average amount paid by Social Security in 2021 was $1,543.00
TRUE/FALSE - Studies show that employees are 14 times more likely to save when they have a retirement plan at work than if they are saving for retirement on their own.
True
EBRI 2019 Retirement Confidence Study
TERM: Employer-sponsored plan
A retirement plan set up and overseen by an employer for the benefit of its employees.
3 facts of Employer-sponsored plans
- They are second only to Social Security in providing retirement benefits to Americans.
- Tax advantage for both the employer and employee. Employer contributions are currently tax-deductible to the business.
- Help attract and retain employees. (Some plans increase the benefits employees are entitled to based on how long they have worked for the employer)
Sponsoring a qualified retirement plan is…
Voluntary, not mandatory, and so the rules provide tax incentives for employers who choose to sponsor a plan
TERM: Plan Sponsor
The designated party (usually an employer or company) that establishes and maintains the plan for the benefit of the company’s employees
What is a fiduciary?
Under the Employee Retirement Income Security Act (ERISA), a person is a 401(k) plan fiduciary “to the extent that he exercises discretionary control or authority over plan management or authority or control over management or disposition of plan assets, renders investment advice regarding plan assets for a fee, or has discretionary authority or responsibility in plan administration.”
True/False - Employee Contributions, like an employer’s decision to be a plan sponsor, are involuntary.
False - Employee Contributions and the decision to be a plan sponsor are voluntary.
TERM: ERISA
The Employee Retirement Income Security Act, a law passed in 1974, covering employee benefit plans. It provides protection to participants of retirement plans. ERISA ensures monies are protected, even in the event of an employer’s bankruptcy.
Under ERISA, employers must operate their plan…
for the exclusive benefit of plan participants and beneficiaries.
3 Benefits of Employee Contributions to Employer-Sponsored Plans
- Employees do not currently pay taxes on Employer contributions.
- Plan investments are often professionally managed
- Employees’ benefits are often funded solely by their company’s contributions.
Government benefit plans usually required employees to contribute toward their retirement benefits in addition to government contributions.
Employees can save for retirement using a payroll-based systematic method which means?
Money is easily and automatically transferred to a retirement account each pay period.
What are Employee Pre-Tax Deferral Contributions?
Contributions are not included in income for tax purposes. Taxes on earnings from pre-tax monies are deferred. Employees can defer taxes during their high-income working years and pay taxes in retirement when their income tax rate is likely lower.
What are Employee Roth Contributions?
Contributions on an after-tax basis that gain the advantage of tax-deferred investment earnings.
