According to the annual Employee Benefit Research Institute (EBRI) Survey, “employer-sponsored retirement savings plans are an important savings vehicle for American workers.” In addition to helping employees save for retirement, employees increasingly turn to their companies to inform them about retirement issues.
You can help to meet employee needs by sharing certain information.
1. Active participation status
If your company has a qualified retirement plan covering employees, you are required to report this on W-2 forms. More specifically, active participation status of employees is denoted in Box 13 of Form W-2.
Why is this information important for employees? It tells them whether they are subject to an IRS income limitation for making deductible IRA contributions. If they are active participants, they cannot deduct such contributions unless their modified adjusted gross income is below set limits.
Even if they are active participants, they can still save for retirement using a Roth IRA. Again, income limits apply here, but being covered by a retirement plan is not. Direct employees to IRS Publication 590 for details on IRA contributions.
2. Opt out elections
If you have an automatic enrollment feature in your company’s 401(k) plan, you must give employees the right to opt out or to reduce the default salary reduction contribution. Usually this is done at least 30 days but no more than 90 days before the start of the plan year (most small businesses run their plans on a calendar year). Find more about the opt-out feature from the IRS; this includes the notice form you give to employees.
3. Employer contributions
Depending on the type of qualified retirement plan used by your company, you may or may not be required to make any contributions on behalf of employees. Certainly, this is information that employees want to know.
If you make contributions and plan to change them in any way (e.g., reducing the percentage used to figure your contributions; changing the timing of contributions to an annual lump sum for employees still on the payroll at that time), you must notify employees in writing. You’ll find notice requirements buried in the IRS Checklist (it may be too late for changes for 2013, but check with your tax advisor).
4. Loan options
Your qualified plan may permit participants to borrow money from their accounts. The tax law limits how much can be borrowed and requires repayment in level amounts over a period of no more than five years (with the exception of borrowing to buy a home). The plan sets the interest rate on the borrowing.
Tell employees, through a form letter or in the employee manual:
• Who to contact (the plan administrator) if they want to take a loan.
• What the loan means for plan participation. Usually, they are barred from contributing while the loan is outstanding.
• Whether interest is deductible. This usually depends on whether the participant is an owner or other key employee.
5. Special distributions
Usually, qualified retirement plans must bar distributions until employees retire or leave the job. However, distributions can be taken earlier (without disqualifying the plan) under certain circumstances:
• Hardship distributions can be made if a participant has a serious financial need, such as paying funeral expenses for a spouse or dependent. The distribution is taxable to the participant (and subject to penalty unless a penalty exception applies).
• In-service distributions to a participant age 62 or older who is still working for the company. Again, the distribution is taxable to the employee, but not subject to a penalty because he or she is over age 59½ (a penalty exception).
• Distributions pursuant to QDROs (qualified domestic relations orders) for a participant who is getting a divorce or legal separation. The court can direct that benefits be paid to an “alternate payee,” such as the spouse. Such amount is not taxable to the participant but rather to the alternate payee.
If employees ask questions about your company’s retirement plan or their retirement planning that you can’t answer, consult with a tax or financial advisor.