A Comprehensive Guide to Retirement Plan Enrollment

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Prepare for a life beyond work by setting goals for saving and planning for your future. Use online financial tools to help get you started.

Ensure your plan’s structure and functionality conform to the Internal Revenue Code. Verify whether your plan satisfies the minimal requirements for employee participation.

Pension Plan

You can use your employer’s pension plan to save for retirement and take advantage of certain tax benefits. A pension plan is a defined benefit plan that provides a fixed income in retirement. It is usually based on a formula considering factors such as your years of service, preretirement earnings, and retirement age.

The Employee Retirement Income Security Act of 1974, or ERISA, is the federal statute regulating most private pension systems. This law places obligations on people in charge of most employer-sponsored retirement programs in the private sector and establishes standards for them. You can find information about your employer-sponsored retirement plan in the plan document or Summary Plan Description, which should explain how the plan works and how you earn benefits.

It would help if you also looked for the vesting schedule that describes when you become fully vested in your employer’s contributions to the plan. If you are considering changing jobs, reviewing your vesting schedule is essential to determine whether you will lose any vested assets. It would help if you also understood how a change in employment or other circumstances, such as a divorce, might affect your eligibility to benefit from the plan.

A pension is a stream of guaranteed payments that you can receive in retirement, regardless of how the investments that fund your retirement account perform. Generally, you will receive monthly pension payments for life or until your death. Some pensions pay a percentage of your average salary with the company or government over the years. For example, a worker with decades of company tenure may be entitled to 85% of his final average salary.

If you have questions about your pension or need help with how your employer runs the plan, you should write to your administrator. Explain your concerns and request a written response within thirty days of receiving your letter. You can also file a complaint with the Department of Labor if your employer violates ERISA regulations.

401(k) Plan

One of the most popular retirement savings and investing alternatives for both employers and employees is a 401(k) plan. It has existed for over 40 years and is a well-liked option for numerous companies.

A percentage of participants’ wages can be saved and invested in funds selected by the plan, such as ADP Retirement, through 401(k) plans defined contribution accounts. Mutual funds and exchange-traded funds are among the investing options available to employees. Since the contributions are tax-deferred, when the participant withdraws them in retirement, they are subject to income tax.

Employees can typically contribute up to $22,500 annually to their 401(k) accounts. However, if they are at least 50, they can make an additional $7,500 in catch-up contributions. This limit is adjusted annually by the IRS.

Employers may match a certain amount of employee contributions. It is known as the employer matching contribution. Depending on an employer’s size, this could be as much as 100% of an employee’s payroll deductions. Some 401(k) plans also allow employees to contribute independently through personal deductions from their paychecks.

Some 401(k) plans may also have lifetime loan options, allowing employees to borrow up to 50% of their account balance at any time. These loans must be repaid in a set period, usually within five years. Employees must pay taxes and a 10% penalty fee if they don’t repay their loan.

In addition to 401(k) plans, there are other retirement savings options for employees, including traditional and Roth individual retirement accounts (IRAs). An IRA is an account opened on an individual basis by an employee through a financial institution. Unlike a 401(k) plan, an IRA does not offer employer contributions. Business owners can also establish employee retirement plans, such as a Simplified Employee Pension (SEP) or a Savings Incentive Matching Plan (SIMPLE). Regardless of the type of retirement plan used, employees must understand how much they withhold from each paycheck and how those funds are invested. It will help them determine if the choices made for them by their employers are working in their favor.

Flexible Spending Accounts

FSAs allow employees to set aside pretax dollars from their paychecks to pay for out-of-pocket healthcare expenses and dependent care costs, lowering their taxable income. These expenses would otherwise be deducted from their paycheck and subjected to federal, state, and Social Security taxes. Money in an FSA is withdrawn tax-free and can be used to cover eligible medical, dental, and vision expenses. These expenses may include health plan deductibles and copayments; eye exams, contact lenses, and glasses; prescription and over-the-counter medications; dental care, including orthodontia; and specific medical equipment.

Employees must estimate their annual out-of-pocket medical and dependent care expenses during the open enrollment period to determine how much they want to put in an FSA for that year. They can then submit their annual election online or call a toll-free number before the close of the open enrollment period.

The IRS sets strict guidelines for FSA accounts, a flexible spending arrangement. Generally, only the amount an employee spends during a benefit year will be deducted from their paycheck and reflected in their balance. Any unused funds in an FSA at the end of a benefit year are forfeited. An exemption may be granted if an employee has a medical condition that keeps her from spending the money in her account or if her circumstances change due to marriage or the birth of a child.

Suppose an employee cancels their participation in an FSA because of a qualifying event. If so, they have to use a form that the program provides to notify the program administrator in writing of the qualifying event within 60 days of it happening.

Health Savings Accounts

An HSA is a bank-owned, tax-advantaged account that allows you to save pretax dollars for future qualified medical expenses and invest your money (similar to an IRA or 401(k). The funds in an HSA are yours to spend forever, even if you retire or change jobs or health plans. You can use the money to pay for any IRS-qualified out-of-pocket medical expenses, including deductibles, copayments, and coinsurance.

You can also use the money to purchase health-related investments, such as stocks and mutual funds. At enrollment, you can choose from a target-date fund or another default investment option; however, you can change your investments anytime.

Generally, to be eligible for an HSA, you must be enrolled in a high-deductible health plan. This type of health plan typically has lower premiums/plan contributions and higher deductibles than traditional health plans. When you enroll in an HDHP, your health plan will notify the HSA administrator and deposit “premium pass-through” payments into your account. Depending on the health plan, these payments may be based on your actual costs or their negotiated provider fees. When you receive care, getting an explanation of benefits from your health plan, which will explain your liability after the health plan’s negotiated fee is applied, is essential.

The best part is that you can take your funds if you have an HSA and change to a regular health plan with lower premiums/plan contributions. They don’t expire. You can also keep your HSA and switch to a new employer-sponsored health plan or an independent one anytime.

If you are over 65 and no longer contributing to an HSA, you must begin contributing to Medicare Part B to avoid penalties. You can delay Medicare Part A, but it is important to note that you will be automatically enrolled in Part A when you reach retirement age unless you specifically decline it.