When employees start a new job, their company may offer certain types of employee benefits. These benefits can range from medical insurance, flexible spending accounts, and a company retirement plan. I wanted to point out some of the terminology used in the company retirement plan area to make sure you understand what those items mean.

Eligibility- Each retirement plan has different eligibility requirements to allow for an employees participation in the plan. Some employer retirement plans are restrictive which makes employees wait until they can contribute while other employers may allow you to start contributing immediately. It is important for employees to understand when they are eligible and how to start participating.

Vesting- The amount of money the employee would be able to walk away with if they were to leave the company. Companies may have certain vesting schedules that you need to be aware of when deciding to leave an employer.

                Cliff Vesting– After a certain period of time, your employer contributions are 100% vested. For example, after 3 years at                          your current employer, all your employer contributions become vested.

                Graded Vesting- Your employer contributions become vested over a period of time with a certain percentage being eligible                  each year. An example would be that you become 20% vested each year for 5 years and then become fully vested in your                      employers’ matching contributions. Please see the chart below for further clarification.

                                                                                     XYZ Company Graded Vesting Schedule

Elective Match– The employers match of an employee’s deferral to a defined contribution plan. For example, a 3% match is if an employee made $100,000 salary and decided to defer 3% into their employer sponsored plan. They would contribute $3,000 from their paychecks and get a match of $3,000 by their employer. The employee contribution is always 100% vested, but the employer’s contribution may be subject to a vesting schedule.

Non-Elective Match- This is a type of match where an employee would receive an employer contribution to their retirement plan regardless if they contributed. For example, if an employee was making $50,000 and the plan had a 2% Non-Elective Match, the employer would make a $1,000 contribution to the employee’s account regardless if the employee contributed to the plan. This type of contribution may also be subject to a vesting schedule.

Safe Harbor Match- This type of match is commonly found in 401(k) plans. The employer’s contribution to the retirement plan is fully vested to the employee and they can take the full balance of the account if they retire or decide to leave the company. The benefit to the employer is they automatically pass nondiscrimination testing (Actual Deferral Percentage Test and Actual Contribution Percentage Test). This means they can contribute to the plan without fear that their contributions may be returned to them due to failing the aforementioned tests.

Understanding Your Payroll Elections: As an employee, you will be receiving paychecks from your employer. Once you decide to defer a portion of your paycheck, you will need to contact your payroll department or provider to confirm the change. Many times, participants will change their contribution percentage through their retirement plan provider and not through payroll. This change may not be reflected in their paystub and should be confirmed with your payroll department or provider.

Custodian: This is where your employee and employer contributions are being held and is the platform used to invest your funds.

Rollover: A rollover can mean moving your old employer plan into your new employer plan. Additionally, you can also roll your old employer retirement plan account into an IRA at the custodian of your choosing.

It is important for employees to understand the different terms in their company’s retirement plan. 

Feel free to reach out to me with any questions on these items.

Michael Sherman, CPA, CFP®, CPFA, CDFA®
OWNER
Sherman Wealth Solutions LLC
Michael.Sherman@shermanws.com
O  980.350.0170
F   980.350.0180
www.shermanws.com

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