Frequently Asked Questions and Answers
select from the topics below
 401(k) and retirement plans
Flex benefits and reimbursement accounts
COBRA
Answers to Frequently Asked 401(k) Questions
- What are the advantages of a 401(k) Plan?
Contributions are made with tax-free dollars. This money is deducted first and all taxes are paid on what remains after the 401(k) contribution is taken. As money in the plan earns income and gains in value, these gains are also not taxed. You pay taxes on 401(k) money only years later when you spend it in retirement. ▲ Back to top
- What is a Roth 401(k) and how is it different?
Roth 401(k) contributions are made with dollars that have been already taxed. The gains on this money while it is in the plan are not taxed. Years later, when you spend your Roth 401(k) money in retirement you pay no taxes at all on any money you take from the plan. ▲ Back to top
- My 401(k) plan stinks. What can I do about it?
The company decision-makers who choose your plan’s investments and the plan service providers should know that you are unhappy. They have a legal obligation to operate the best possible plan the company can afford. They should be reviewing the service, the investments, and the cost of the plan on a regular basis. The decision-makers will typically be the company owners as well as the financial and human resource people. ▲ Back to top
- How do I determine what my mix of stocks and bonds should be?
Your mix of mutual funds that invest in stocks or bonds (or both) should depend first on the length of time you have until retirement and your comfort level with regard to risk. To “beat inflation” you need to invest at least some of your money in stocks, but you have to accept the possibility of occasional sort-term losses in value. Historically, the stock market has always recovered from any “dips” and has averaged a 10% annual return. ▲ Back to top
- How does Pension Dynamics help me optimize my investment choices?
Pension Dynamics will suggest a diversified mix of investments chosen from among the funds offered by your plan. We will do this in either a group setting with written materials or in a one-on-one individual meeting or through a phone consultation. ▲ Back to top
- What should I know about owning company stock in my 401(k)?
It is never a good idea to have very much company stock in your 401(k). This makes both your job and your retirement nest-egg dependent upon a single company. ▲ Back to top
- Will I be charged fees or a load to buy my mutual funds?
In a 401(k) at Pension Dynamics, there are no funds that charge a commission. The only cost to you is the annual expense ratio of the fund. This is a disclosed cost that indicates the percent of your account each year that the fund has taken to cover its costs. This amount will typically be less than 1% per year. You never receive a bill for it and you never make a payment. It is just automatically deducted from your account. ▲ Back to top
- Are there special retirement plans for non-profit organizations?
Most non-profits now offer 401(k) plans but the traditional retirement account for non-profits has been the Tax Sheltered Annuity (TSA.) A 401(k) is generally superior because the investments have lower annual expense ratios. Most TSA’s are sold by agents who receive commissions from the investments that in turn charge you higher expense fees. ▲ Back to top
- I’m a "highly compensated employee” – can I benefit from a 401(k) plan?
Absolutely. In some cases, because of complicated 401(k) participation requirements requiring most employees to contribute, a plan that does not meet these requirements will then have to limit what highly compensated employees deposit into the plan. While the legal limit for 2007 is $15,500, you could be informed at the end of the year that you contribution will be limited to, for example, $12,000 so that your plan will pass its tests and not be discriminating in favor of highly-compensated employees (HCE’s.) An HCE is someone who made more than $100,000 in the previous year. ▲ Back to top
- Should I take a loan against my 401(k)?
Why not? It’s your money and the plan allows you to become your own banker. You will pay interest to yourself when you borrow, because every dime you pay is credited right back to your own account. You will be charged what a neighboring bank would charge for the same type of loan. Let’s say the prevailing interest rate is 7%. If you take your loan proceeds from a mutual fund that then starts rising in value at a rate of 10%, your 7% loan will not be earning as much as the fund you accessed for the money. This means you will have lost out on what would have been the 3% of additional earnings. On the other hand, if you take the loan proceeds from a money market fund that earned only 4%, you loan will actually be a better investment for your account because it is “earning” 7%. You’ll never know until after the fact if your loan was a wise move or not. It depends on what otherwise would have happened to the investments you chose as the source of your loan proceeds. ▲ Back to top
Answers to Frequently Asked Flex Benefit And Expense Reimbursement Plan Questions
Frequently Asked Flex Benefits Questions
- What is a Flexible Benefit Plan?
A Flexible Benefit Plan, also known as a Section 125 Plan, or a Cafeteria Plan, gives employees the ability to purchase certain qualified benefits with pre-tax dollars. Essentially, they would exchange taxable compensation for non-taxable benefits. These "tax-free benefits" can include medical insurance premiums, reimbursement of out-of-pocket medical expenses, and reimbursement of work-related dependent daycare expenses. Flexible Benefit Plans are so popular because they offer employees a choice of benefit options and because they allow both employees and employers to save tax dollars.
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- How does a Flexible Benefit Plan benefit the employer?
Hard Dollar Savings: Every dollar employees defer into the Flex Plan is withheld from their pay before any taxes are calculated. As the employer, you will save your portion of social security tax, Medicare, and any other taxes your state requires you to contribute on behalf of your employees. In addition, in most states your Workers Compensation Premiums will be calculated on your employees’ “after-flex” salary.
Soft Dollar Savings: By implementing a Flexible Benefit Plan you will be offering employees the opportunity to keep some of what would have otherwise disappeared in taxes. It is like giving your employees a "raise" that does not cost you a penny in cash or payroll taxes.
Recruiting and Retaining Talented Professionals: Flexible Benefit Plan can be a valuable recruiting tool. Once exposed to the value and versatility of a Flexible Benefit Plan, many employees have told us they would not want to be without one. It can make the difference when you are trying to attract talented, committed professionals to your company. A Flex Plan will also increase your current employees' satisfaction with their benefits package, which enhances your ability to retain your valuable staff members.
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- How does a Flexible Benefit Plan benefit the employee?
A Flexible Benefit Plan allows employees to convert many expenses, which were previously not deductible, into expenses that can be paid for with pre-tax dollars. They can do this by making pre-tax contributions to the Flexible Benefit Plan. These contributions reduce their gross or taxable income so they pay less in taxes.
When an employee elects to participate in a Flexible Benefit Plan they will save:
- FICA withholding Tax (Social Security & Medicare)
- Federal Withholding tax
- State withholding tax (not applicable in some states)
Premium Account: Signing up for the Premium Account allows employees to have their portion of company sponsored insurance premiums withheld before taxes are calculated. This option will increase their take-home pay with the stroke of a pen.
Medical Reimbursement Account: The Medical Reimbursement Account gives employees the opportunity to save taxes on their family’s out-of-pocket health care costs. This may include medical services that are not covered by traditional insurance at all (chiropractic or acupuncture treatments for example).
Dependent Daycare Account: The Dependent Daycare Reimbursement Account allows employees to use tax-free dollars to pay their daycare providers. In most cases, the employee will experience greater tax savings through this type of reimbursement account than if they would use the Daycare Tax Credit on their tax return. ▲ Back to top
- What can a Medical Reimbursement Account be used for?
The Medical Reimbursement Account enables employees to pay for expenses that are not covered by insured medical plan(s), with pre-tax dollars. This account allows employees to be reimbursed for out-of-pocket medical, dental, and vision expenses as well as over-the-counter medications. Reimbursable expenses are similar to those normally deductible on a federal income tax return (without regard to the 7.5% of adjusted gross income limitation). They include, for example, expenses incurred for:
- Deductibles and Office Visit Co-payments.
- Prescription medications, vaccines, birth control, and infertility treatments.
- Medical doctors, dentists, eye doctors, chiropractors, osteopaths, podiatrists, psychiatrists, psychologists, physical therapists, acupuncturists and psychoanalysts.
- Medical examinations, X-rays, laboratory services, and insulin treatments.
- Hospital care, clinic costs, and lab fees.
- Medical treatment at a center for substance abuse.
- Medical aids such as hearing aids (and batteries), dentures, prescription eyeglasses and/or contact lenses, braces, orthopedic shoes, etc.
- Over-the-counter drugs and medications used for the treatment of a medical condition, injury, or illness.
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- What can a Dependent Daycare Reimbursement Account be used for?
The Dependent Daycare Reimbursement Account enables employees to pay for out-of-pocket, work-related dependent daycare cost with pre-tax dollars. In some cases, this account may be used for adult daycare (the cost of daytime supervision of an adult child, spouse, or dependent parent who is incapable of caring for themselves). Daycare services may be provided by a friend or family member and still be eligible for reimbursement through the plan.
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- How can I control health care costs for my company and my employees?
These plans are called “Flexible Benefit Plan” because you can adjust your plan design to meet your needs. For some that means focusing on reducing costs, others may want to add choices that augment existing insured plans and create more comprehensive coverage. Some employers want to partially fund these accounts to help cover expenses that aren’t otherwise being addressed by the rest of the benefits package. Often the combination of moving to a health plan with higher out-of-pocket costs, and subsidizing the Medical Reimbursement Account, can result in lower over-all costs without reducing coverage.
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- What is a Pre-Tax Commuter Expense Reimbursement Program?
Pre-Tax Commuter Expense Reimbursement Programs give employees the ability to pay for qualified travel expenses with pre-tax dollars. This means you can offer employees the opportunity to set aside a portion of their salary, before taxes are calculated, and use that money to pay for work related parking and public transportation. The amount set aside is completely exempt from Federal income taxes and Social Security (FICA), as well as California income and SDI taxes. This generates savings to both you, as the employer, and to your employees.
Not only are these plans a competitive way to cope with the cost of getting employees to and from their jobs, the savings generated for the employer will often pay for the administration. That makes this a virtually FREE BENEFIT!
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- How does Benefit Dynamics help me optimize my Plan Options and ensure my compliance?
By providing you with trained professionals who specialize in this type of employee benefit. Our first priority, as an independent consulting firm, is to help you find creative solutions so you can meet your objectives in a cost-efficient manner. Our second priority is to provide you with personalized service and plan design consulting that meets the highest standard of compliance.
We also pride ourselves on our superior ability to effectively communicate these benefits to your employees and outstanding customer service. This, in turn, leads to higher employee participation and generates greater satisfaction with their benefit options.
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Answers to Frequently Asked COBRA Plan Questions
- What is COBRA?
The Consolidated Omnibus Budget Reconciliation act of 1985 (COBRA) requires employers with group health plans to give employees the opportunity to continue their group health care coverage under the employer’s plan if their coverage otherwise would cease due to termination, lay off, or other changes in employment status.
The Department of Labor estimates that 90% of employers are out of compliance with COBRA regulations. Many do not realize that their COBRA responsibilities start the day an employee enrolls in group health coverage, not the day they loose that coverage.
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- Why must I comply with Federal COBRA?
COBRA administration requires adhering to employee communication requirements and stringent timelines. Inefficient management of these timelines exposes your business to additional healthcare claims, which can affect your future premium rates and negotiations.
Penalties for failing to comply can be devastating:
- Lawsuits from former employees
- Unintended liability for medical claims
- IRS excise taxes, and
- ERISA penalties that cost employers millions of dollars every year
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"If you are looking for a well-designed 401(k) plan with superb investment advisors and administrative support, you have found a precious gem in Pension Dynamics."
Cathy Long, Director
Human Resource & Administration
The Perfect Puree of Napa Valley
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