Employment Retirement Income

Acquire a woiking knowledge of the Employment Retirement Income Security Act. 

Perhaps more important than state law, however, in determining one s legal rights under a pension plan is ERISA—the 1974 Employee Retirement Income Security Act. ERISA, by altering the requirements which employee retirement benefit plans must meet in order for an employers contributions to qualify for tax deductibility, has standardized private pension plans in ways most favorable to covered employees. Tax savings and protections are also available under either a qualified group retirement plan or an H.R. 10, Keogh, or I.R.A. plan wherein an individual may set up a tax-deferred retirement fund for himself. 

In retirement, most people receive income from three sources—employer pension plans, Social Security, and personal savings. In the following calculation, you estimate what you can expect from employer pensions and Social Security. This is compared to your estimated retirement income needs to determine what you must provide from personal savings. 

Employee Retirement Income Security Act of 1974, Public Law 93-406 (ERISA) this law mandates reporting and disclosure requirements for group life and health plans. It also exempts many self-insured employers from many state health insurance regulatory requirements, employer contribution the amount an employer contributes toward the premium costs of the contract. This amount carries widely among employers and is a critical variable in any risk analysis. Employer contributions can be based on dollar amounts, percentages, employment status, length of service, single or family status, or other variables or combinations of the above. 

In offering pensions, U.S. employers and the federal government strive to replace a retiring worker s sakry with an equal retirement income. This income flows from three sources, which are Social Security payments, the employee s preretirement savings and investments, and pension benefits. Pensions strike a balance between lower present salaries and dependable future incomes when employees retire. 

Among all workers, participation in defined benefit plans has fallen while participation in defined contribution plans has risen. In defined benefit plans, companies promise to pay workers a specified amount in retirement benefits. In defined contribution plans, companies promise to contribute a specified amount, but make no assurance as to the final payout. Among all workers, there has been a decrease in the percentage covered by defined benefit ( payout ) plans and an increase in the percentage covered by defined contribution ( pay in ) plans. For more and more workers, this means that risk — in terms of steady retirement income — has been transferred from the employer to the eventual retiree (Figure A4.8). 

Recognize, as mentioned earlier, that a person would probably have additional resources upon entering retirement such as inheritance, proceeds from a reverse mortgage on a home, royalties. Social Security, income from part-time employment, and income based on drawing on the net worth s principal. And, of course, a person could invest more than ten percent of their income. In summary, the optimum ten percent, career-long investment program for the hypothetical student or young professional would probably lie between Scenarios B and C. 

Setting up ones own retirement plan holds two advantages a deduction may be made against the current income, and the money appropriated under the plan remains tax-exempt for a specified period of time. Self-employed individuals may choose from two plans, an individual plan or the Keogh (HR-10) plan. Those not self-employed may only establish an individual-type retirement plan. These plans are governed by specific requirements for eligibility and certain restrictions applied when the plan is in effect. 

Once it has been established that you may set up an individual retirement account, you must consider the maximum amount of contributions which can be made under this type of plan. The contribution limitations are 1500 or 15% of your earned income, whichever is less. For these type of plans, earned income is defined as wages, salaries, professional fees, and self-employment income. It does not, however, include earnings from property, such as interest, dividends, or rents. These latter types of earnings are considered passive income and cannot be considered in calculating the amount of contribution which may be made. 

The maximum contributions under a Keough Plan are substantially higher than under an individual retirement account. The contribution limitations are the lesser of 15% of earned income or 7500. Earned income for contribution purposes does not include wages, salaries, dividends, or interest. Earned income includes only net earnings from self-employment. 

If you plan to earn income after retiring, you need to look carefully at the net effect of your earnings on your overall tax bill and plan your income to minimize any adverse effect. In addition to the graduated schedule of federal and state income taxes, consider the effect of earnings on Social Security benefits and the cost of self-employment tax. 

With Medicare s Hospital Insurance Trust Fund, also known as Medicare Part A, workers make required contributions to the fund while fhey are employed. Upon retirement, workers receive health care benefits. By law, employers and their employees are required to pay equal portions of a payroll tax, which totals 2.9% of earned income.In 1997, almost 90% of the trust fund s income was from payroll taxes. The remaining income was generated from fhe inferesf earned from the trust fund. A beneficiary s Medicare Parf A insurance is limifed to only those hospitals accredited by the Joint Commission on Accreditation for Healthcare Organizations (JCAHO). The JCAHO accreditation standards include explicit and extensive professional pharmacy acfivifies, indirectly supporting professional trends for clinical pracfice (see Chapfer 18). 

Mandatory contributions are basically calculated on the basis of 10% of an employee s relevant income, with the employer and employee each paying 5%. Self-employed persons also have to contribute 5% of their relevant income. Mandatory contributions must be paid to registered MPF schemes managed by trustees. They mustbe paid for each period for which an employer pays relevant income to his or her employee. Investment managers will be appointed by the trustees of MPF schemes to make long-term investment of scheme assets and accrue benefits for the scheme members for their retire-... 

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