For the Company

The retirement plan must be in the form of a written plan document. That document must comply with current law and be amended as needed to remain current with future law.

For the Participant

The company is required to provide a written document called a Summary Plan Description (SPD) to plan participants that communicates the plan provisions in simplified wording. This must be provided when an employee becomes eligible for the plan. If a change takes place that impacts the SPD, summaries of the change must be provided to participants in writing also.

Participants must receive various information in written form annually, such as information for them to determine their vested balance, disclosure of plan provisions such as safe harbor, and disclosure of plan fees. The company will usually satisfy this requirement through services provided by both their compliance and investment service providers.

The company elects the requirements an employee must complete to enter the retirement plan. The requirements are in respect to attainment of a certain age and completion of a certain amount of service while employed. Once these requirements are met, an employee then enters the plan on the entry dates the company elects. The requirements and entry dates are specified in the retirement plan documents. There are legal maximums to the age and service an employee may be required to meet to enter the plan.

For example, eligibility requirements may be: attainment of age 18 and completion of 6 months of service. Entry dates may be the first day of the quarter following completion of the eligibility requirements.

Employee Contributions

The retirement plan may contain a feature allowing employees to defer receiving some of their compensation to put it into the company retirement plan. These are called employee contributions to the retirement plan. Monies are taken from an employee’s paycheck, per the employee’s written instruction, and put into an account in the retirement plan for the participant. The participant is always 100% vested in these monies. Once monies are in the retirement plan, they are meant to be for the participant’s retirement. Accordingly, there are restrictions on how the participant may access these monies in the future. See the Withdrawal of Contributions section for more information.

Employee contributions may be pre-tax, called 401(k) contributions. A plan participant does not pay federal or state taxes on compensation when it is deferred and made as a 401(k) contributions, but he does pay FICA taxes on the compensation. The contributions, plus earnings, will be taxable to the participant when later withdrawn as a cash distribution.

Employee contributions may be after-tax, such as Roth 401(k) contributions. A plan participant does pay federal, state and FICA taxes on compensation when it is deferred and made as a Roth 401(k) contributions. The contributions will not be taxable to the participant when later withdrawn as a cash distribution. If the distribution meets certain requirements and is qualified, the earnings will also not be taxable to the participant.

Employer Contributions

The retirement plan may contain a feature allowing employers to make contributions to the company retirement plan. The employer contributions are pre-tax monies. The company may claim a deduction for making them and the employees do not pay taxes when the monies are put into the company retirement plan account.

The employer contributions may be required or may be discretionary depending on the type of contribution. There may or may not be annual requirements for participants to satisfy to receive it. The employer contribution may be allocated in different ways. It may vest along different time schedules. There are annual limits on the dollar amounts and percentages of compensation that may be made as employer contributions.

For more information on types of employer contributions to a company retirement plan, see Safe Harbor, Profit Sharing.

Vesting is earning rights to employer contributions over time. The vesting schedule is specified in the retirement plan document. The company may elect what vesting schedule applies to monies that are subject to the vesting schedule, such as employer profit sharing contributions. The longest legal vesting schedule in a defined contribution plan is a graduated 6 year schedule. Some employer contributions, such as safe harbor contributions, vest 100% immediately regardless of what vesting schedule the company has elected for the other employer contributions.

Monies in the company retirement plan are intended to be available for an employee when she retires. The ultimate focus is saving for retirement. Accordingly, access to these monies are restricted before an employee reaches retirement age. There are three ways to access these retirement monies while someone is still employed. If someone is terminated, they have full access to the vested monies in their company retirement plan account and can take a full withdrawal of their vested contributions and earnings.

The company specifies in the retirement plan document what access active employees have to the vested monies in their retirement plan account. The three ways are:

• In-Service Withdrawal - May be allowed when an employee reaches a certain age, usually somewhere between 59.5 and 65. The employee may take as little or as much of their vested balance as they’d like, however they’d like, as cash or rolling it over to another retirement product.

• Loans - May allow an employee to borrow money from the vested monies in his account in the company retirement plan. The provisions are specified in the company retirement plan, such as how many loans per person are allowed at one time, the interest rate applicable, and reasons loans will be allowed. Loans are usually paid back through payroll deductions.

• Hardship Withdrawal - May be allowed when an employee faces a sudden, immediate financial burden and has exhausted all other withdrawal options. The monies available may be restricted.

Annual Testing

Qualified retirement plans must pass annual testing. The annual testing required depends on what features the retirement plan contains. A plan with a 401(k) provision is required to pass an annual 401(k) Discrimination Test, for example.

Annual Return / Form 5500

Most qualified retirement plans must file an annual return/Form 5500. This is an information return. The information contained in the return will depend on the specifics of the company and the retirement plan.

Persons with authority over the retirement plan are considered plan fiduciaries. They are required to act prudently, and for the sole benefit of the plan participants. If fault is found, the plan fiduciaries could be found personally liable. Good practice will ensure fiduciary protection, such as hiring qualified service providers for compliance and investment services, and operating the plan according to the plan document.

Contributions must be invested. The company chooses an investment company where the retirement plan assets will be invested, and then elects whether the company or the participants will direct the investment of the monies within the investment company. There are rules surrounding the investment of plan assets that must be met for the plan to remain qualified. Monies within the plan must be record kept, regardless of whether the company or plan participants direct the investments of assets within the plan. Record keeping is tracking the various money types separately, such as employee monies versus employer monies within one participant account, and reflecting earnings of those monies. Additional information must be provided to participants along with the balance of their account.

The plan investments should be reviewed annually by the company to ensure fees are reasonable and the offerings still meet the needs and objectives of the plan participants.