Bottom Line Up Front

• Stock purchases prioritize continuity but carry more risk. The buyer acquires the entire company, including employees, contracts, benefit plans, and all existing liabilities. 
• Asset purchases offer more control and tax advantages. Buyers can selectively assume assets and liabilities, but benefit plans typically do not transfer and must be rebuilt. 
• Deal structure has real implications for employee benefits. Retirement plans and pensions can significantly affect risk, cost, and post-closing complexity, making early planning essential

When a business is acquired, the structure of the deal matters — a lot. Two transactions that look similar on the surface can have very different consequences once you dig into the taxes, liabilities, employees, and benefit plans. 

Most acquisitions fall into one of two buckets: stock purchases or asset purchases. While lawyers and tax advisors usually drive the final structure, understanding the basics can help you avoid surprises especially when retirement plans or pensions are involved.

Let’s break it down. 

The Big Picture: Two Ways to Buy a Business

At a high level, here’s the difference:

• Stock Purchase: The buyer purchases the ownership interests (stock, membership interests, or shares) of the company itself. 
• Asset Purchase: The buyer purchases specific assets and only the liabilities they choose to assume. The seller remains the legal owner of the existing business.
  

Same company. Very different outcomes. Each approach has different legal, tax, and operational consequences.

From the Buyer’s Perspective 

Stock Purchase – Pros

A stock deal keeps the business largely intact.

• Continuity is built in. Contracts, licenses, vendor agreements, employees, and benefit plans usually carry over automatically. 
• Fewer moving parts after closing. There’s no need to retitle every asset or renegotiate dozens of  agreements. 
• Customer relationships stay smooth. From the outside, the company looks and operates the same. 

This structure is often attractive when speed, simplicity, and continuity matter most. 

Stock Purchase – Cons 

The continuity comes with a price. 

• All liabilities come along for the ride. Known and unknown — tax issues, legal claims, environmental exposure, and benefit plan compliance problems. 
• No tax step-up on assets. The buyer doesn’t get increased depreciation or amortization deductions. 
• Heavier due diligence. Buyers must dig deep into historical operations to avoid inheriting unpleasant surprises. 

__________________________

Asset Purchase – Pros 

Asset deals offer more control. 

• Liability protection. Buyers can pick which liabilities they want and leave the rest behind. 
• Tax advantages. Purchased assets are stepped up to fair market value, often producing meaningful future tax deductions. 
• Flexibility. Buyers can decide which employees, contracts, and operations to continue. 

This structure is common in closely held businesses or situations where risk mitigation is a priority. 

Asset Purchase – Cons 

That flexibility adds complexity. 

• Everything must be transferred individually. Contracts, leases, permits, intellectual property—it all takes time. 
• Consents may be required. Landlords, lenders, and customers may need to approve assignments. 
• Employee disruption is more likely. Workers are often technically terminated and rehired. 
• Benefit plans don’t automatically move. More on that below. 

From the Seller’s Perspective 

Why Sellers Prefer Stock Sales

For many sellers, stock sales are the cleanest exit. 

• One transaction, full exit. The entire company changes hands. 
• Tax efficiency. Gains are typically taxed at capital gains rates. 
• Liabilities move with the company. The seller can walk away cleanly. 

The downside? Buyers may be hesitant to assume all that risk therefore driving lower price points. 

When Asset Sales Make Sense for Sellers

Asset sales can sometimes command a higher price. 

• Buyers may pay more because of tax benefits. 
• Sellers can retain certain assets or carve out parts of the business. 

However, asset sales often bring complications: 

• Double taxation risk for C corporations. The company pays tax on the sale, then shareholders pay tax again when proceeds are distributed. 
• More administrative work. Asset transfers, employee matters, and lingering liabilities all need attention. 

What Happens to Employee Benefit Plans?

This is where deal structure really starts to matter. 

Stock Purchases and Benefit Plans 

In a stock deal, the company and its plans continue to exist. 

• 401(k), pension, health, and welfare plans stay in place.
• Employees typically see little to no disruption.
• No immediate re-enrollment or plan setup is required. 

That said, buyers inherit everything, including compliance issues. Any past problems with ERISA, Form 5500 filings, or pension funding become the buyer’s responsibility. 

Asset Purchases and Employee Benefit Plans

In an asset purchase, employee benefit plans typically do not transfer to the buyer. Instead, the plans usually remain with the selling entity, and the buyer must decide how, and when, to establish new benefit plans for the employees they choose to bring over. As a result, benefit transitions often require more planning and communication than in a stock transaction. 

From the employee’s perspective, this usually involves termination followed by rehire under the buyer’s entity. While day-to-day work may feel the same, benefit participation often changes behind the scenes. 

At a high level, in asset purchases, employee benefit plans generally remain with the seller.

• The buyer’s entity must establish new benefit plans for transferred employees. 
• Employees may be eligible to roll over retirement balances or, in some cases, take distributions. 
• If there is a Defined Benefit Plan, the owner needs to ensure that this doesn’t result in IRC 415 limit issues where  plan assets exceed the benefits that may be paid.

Defined Benefit (Pension Plans)

DB plans require special attention and are often a major risk consideration in asset transactions. 

• These plans usually remain with the seller unless the buyer explicitly agrees to assume them. 
• If the plan is not assumed, the seller remains responsible for:
  
  • Ongoing funding requirements
  • Plan administration 
  • Any termination-related liabilities
    
• If the plan is assumed, the buyer takes on:
  
  • Funding and compliance obligations
  • Potential exposure to the Pension Benefit Guaranty Corporation (PBGC)

Because of this risk transfer, early actuarial and legal due diligence is critical when a pension plan is involved. 

401(k) and Other Defined Contribution Plans 

DC plans, such as 401(k)s, are generally more straightforward, but will still require coordination. 

• The seller’s 401(k) plan typically remains behind or is terminated 
• The buyer establishes a new plan for transferred employees
• Employees may roll over existing balances into the buyer’s plan or an IRA
• Short-term disruptions can occur, particularly around:
  
  • Payroll deductions
  • Employer matching contributions 
  • Enrollment timing
    

Clear communication and advance planning can help minimize confusion and ensure a smoother transition for employees. 

Side-by-Side Comparison 

To bring these differences together, the comparison below highlights how stock purchases and asset purchases compare across key considerations.

What Often Drives the Final Deal Structure

Smaller and closely held businesses often lean toward asset purchases because they offer greater control over risk and liabilities. The ability to selectively assume assets and obligations can be especially appealing when historical exposure or benefit plan risk is a concern.

Larger organizations, on the other hand, tend to favor stock purchases for the continuity they provide. Keeping contracts, employees, and benefit plans intact can reduce operational disruption and help preserve momentum immediately following the transaction.

Defined Benefit pension plans tend to be a key inflection point in deal discussions. In a stock purchase, buyers inherit all funding, compliance, and regulatory responsibilities tied to the plan. In an asset purchase, those obligations typically remain with the seller unless expressly assumed—making early actuarial analysis an important part of evaluating risk.

Across both structures, benefit plan transitions require early coordination. Clear communication around what is changing, what is staying the same, and when decisions need to be made can help prevent confusion and protect employee trust during a period of significant change.

In Summary

Ultimately, the difference between a stock purchase and an asset purchase isn’t just a legal distinction, it’s a decision that shapes risk, tax outcomes, and the employee experience long after the deal closes. What may seem like a technical choice on paper can have lasting implications for liabilities, retirement plans, and organizational continuity. 

For buyers, the structure determines what you inherit and what you can leave behind. For sellers, it affects not only taxes and proceeds, but how cleanly you can step away. And for employees, especially those relying on retirement or pension benefits, the transaction structure often determines whether their benefits feel seamless or suddenly uncertain. 

There is no one-size-fits-all answer. The “right” structure depends on the business, the people involved, and the risks each party is willing to take on. That’s why early coordination between legal, tax, and benefit advisors is essential, particularly when retirement plans or pension obligations are in play. Thoughtful planning upfront can help ensure the transaction supports long-term stability rather than creating unintended consequences down the road. 

The post Stock Purchase vs. Asset Purchase? How the Choice Shapes Risk, Taxes, and Benefits appeared first on Odyssey Advisors, Inc.

Bottom Line Up Front

• Cash Balance plans enable high-income self-employed individuals, particularly those over 40, to supercharge their retirement savings beyond what traditional plans allow.
• Contributions are fully tax-deductible, creating immediate tax savings.
• While powerful, these plans come with strict funding obligations, administrative costs, and complex compliance rules, making them ideal for those with stable income and a long-term mindset.

When you’re self-employed, you’re in charge of everything – from client work to finances to your future retirement. And unlike traditional employees, you don’t have a built-in retirement plan waiting for you. That makes it even more important to find tax-smart, high-impact savings tools. One option that’s gaining traction among high-earning business owners? The Cash Balance Plan.

So, What Is a Cash Balance Plan?

Think of it as 401(k)’s sophisticated cousin. It looks like a retirement account with a balance that grows over time, but it’s actually a type of defined benefit pension plan with a modern twist.

Here’s how it works:

• You (as the employer) contribute a pay credit each year. This can be a percentage of pay or a fixed dollar amount (e.g., 25% pay for owners, 3% for others).
• Then, the account earns an interest credit, a guaranteed rate defined in your plan document. It might be a fixed rate or tied to something like U.S. Treasury yields.
• While it feels like a personal retirement account, it’s actually a company-funded benefit governed by specific pension rules.

Bottom line: You get the structure of a pension with the transparency of an account-based plan.

Why Cash Balance Plans Work So Well for the Self-Employed

1. Higher Contribution Limits – Especially As You Age

If you’re over 40 and looking to make up for lost time, a Cash Balance Plan (CB Plan) offers much higher annual contribution limits than IRAs or Solo 401(k)s. Contributions are calculated using actuarial methods and increase as you age.

Here’s what that might look like:

(Actual limits vary based on income and plan design)

This makes it a standout option for late starters or those finally hitting their financial stride.

2. Major Tax Deduction Power

Contributions to a Cash Balance Plan are fully tax-deductible as a business expense. For self-employed professionals in higher tax brackets, such as doctors, attorneys, business owners, etc., this can lead to substantial savings. Since the contributions reduce your adjusted gross income (AGI), they may also improve eligibility for other tax benefits and deductions. A CB Plan not only helps build retirement wealth but also serves as a highly effective tax planning tool, lowering your immediate tax liability while increasing long-term savings.

3. Catch-Up Power for Late Savings

Many entrepreneurs spend their early years reinvesting profits or weathering financial ups and downs. Saving for retirement typically takes a back seat. As a result, many find themselves in their 40s or 50s with a strong income but a sizable gap in their retirement planning. If you’re in a more stable position but feel behind on your retirement planning, a CB plan can help you catch up fast, especially if you’re aiming to retire in the next 10-20 years.

4. Can Be Paired with a Solo 401(k)

One of the best-kept secrets? You don’t have to choose between plans.

One highly effective strategy used to help self-employed individuals save for retirement is pairing a CB plan with a Solo 401(k) or profit-sharing plan. This approach allows you to maximize your retirement savings across two different vehicles. Together, they can push your total annual retirement contributions well over $300k – $400k, depending on your age and income.

Heads up: When using both plans together, the IRS combined plan limit comes into play. This rule typically caps employer contributions to defined contribution plans to 6% of pay when paired with a Cash Balance plan. So while it may slightly reduce what you can contribute to your 401(k), you’ll still unlock a much larger deductible contribution through the CB plan.

Not only does this dramatically increase your retirement nest egg, but it also provides substantial tax relief in the current year. That’s a powerful one-two punch: accelerated savings and reduced tax liability.

What You Should Know Before You Dive In

These plans aren’t for everyone. They work best for those who have:

• Consistent income
• A long-term view
• The willingness to follow the rules (or have someone help you do so)

These are the things you should consider:

Ongoing Funding Requirements

Cash Balance plans come with strict ongoing funding requirements that distinguish them from more flexible retirement options, such as 401(k)s. Since CB plans are a type of Defined Benefit plan, you’re obligated to contribute an amount each year based on actuarial calculations designed to meet the promised benefit at retirement. 

Contributions must be made consistently to stay compliant and cannot be skipped without potentially facing IRS penalties or plan disqualification. Annual funding must meet minimum thresholds, and underfunding in one year may require catch-up contributions in future years.

More Administrative Complexity (But It’s Manageable) 

Yes, these plans are more complex than an IRA. You’ll need: 

• An actuary to calculate annual contributions 
• A third-party administrator (TPA) for compliance testing and filings
• Annual IRS filings like Form 5500 

But here’s the thing: Most high-income business owners feel the tax and savings benefits far outweigh the admin fees, especially with the right team in your corner. 

Lots of Rules = A Need for Pros

Since Cash Balance plans are a type of Defined Benefit pension plan, they are governed by a web of IRS and Department of Labor regulations. They must comply with the rules that apply to DB plans, such as nondiscrimination testing, minimum funding standards, and benefit accrual limits. Trying to DIY this would be like doing your own root canal. 

Additionally, these plans need to be formally documented and amended as needed to reflect regulatory updates. An annual Form 5500 filing will also be required. CB plans also have strict rules regarding how and when benefits can be distributed, including required minimum distributions and vesting schedules.  

That’s why most self-employed folks work with retirement plan experts (like us) who specialize in small business and self-employed solutions.

Is a Cash Balance Plan Right for You?

For the right self-employed, high-earning business owner, a Cash Balance Plan could be the most powerful retirement tool you haven’t considered yet. While it’s not a fit for every business owner, those with the income and stability to fund it can be a total game changer. 

Let’s Talk Strategy

At Odyssey Advisors, we’ve helped countless self-employed professionals design and manage Cash Balance Plans that fit their goals and cash flow. If you’re curious about what your retirement picture could look like, let’s explore it together. 

The post Are Cash Balance Plans a Good Option for the Self-Employed? appeared first on Odyssey Advisors, Inc.

Bottom Line Up Front

• Contributing too quickly to your 401(k) or changing your contribution rate during the year could cause you to miss out on employer matching dollars if your company matches per paycheck.
• Ask your employer if they offer a year-end “true-up” or pace your contributions.
• Staying aware of plan rules, raises, and contribution limits ensures you don’t leave free retirement money on the table.

When it comes to saving for retirement, a 401(k) employer match might be one of the easiest wins—free money just for contributing to your retirement plan? Yes, please. But what if we told you that you could be accidentally leaving some of it on the table?

Let’s break down what’s really going on with employer matches and how to make sure you’re not unknowingly leaving money on the table.

First, What Is a 401(k) Match?

A 401(k) match is one of the most valuable benefits an employer can offer. Essentially, it’s when your company contributes to your retirement savings based on how much you contribute. For example, your employer might match 25% of the first 6% of your salary that you contribute.

That means if you earn $80,000 a year and contribute 6% of your salary ($4,800), your employer would contribute an additional 25% of that amount — $1,200. That’s an immediate 25% return on your contribution.

So why would anyone turn that down? They probably don’t mean to, but it happens more often than you think.

Learn more: Matching Contribution: What It Is, How It Works, FAQs (Investopedia)

The Hidden Pitfall of Front-Loading Contributions

Some employees, especially high earners or young professionals living at home with low expenses, try to ‘front-load’ their 401(k) contributions. The thought is: contribute as much as possible early in the year, then take a break once they’ve hit the annual limit.

While that strategy can be efficient in some ways, it may backfire when it comes to employer matching.

Here’s why: many employers tie their matching contributions to each paycheck. If you stop contributing mid-year, after reaching the IRS annual limit, your employer may also stop matching. You might have maxed out your personal contribution, but if your employer only matches based on per-paycheck contributions, you could miss out on months of matching dollars.

Real Talk: That’s Money You Could’ve Had

Let’s say you hit the IRS contribution limit by the end of July. Great! But if your employer doesn’t “true-up” your contributions at the end of the year (more on that below), you could be missing five full months of matching funds.

How to Make Sure You’re Getting Every Dollar You Deserve

Avoiding this mistake isn’t complicated, it just takes a little planning. Here’s how to do it:

1. Find out if your employer offers a year-end “true-up”
   
   Some employers run a true-up process at the end of the year. That means they review your total contributions across the year and make up any matching shortfalls, even if you stopped contributing mid-year. If your company does this, great! You’re likely covered.
   
   Action: Contact HR or check your Summary Plan Description (SPD) to see if a true-up is part of your plan design.
   
2. Pace yourself
   
   If your employer doesn’t offer a true-up, you’ll want to time your contributions so they’re spread out over the year. That way, your contribution gets matched with every paycheck.
   
   Pro Tip: Use your payroll calendar to calculate how much to contribute per pay period to hit the annual limit by your final paycheck.
   
3. Monitor changes throughout the year
   
   Raises, bonuses, and other compensation shifts can throw off your contribution pacing. If you receive a bump in pay or a large bonus that’s eligible for 401(k) contributions, reassess your per-paycheck contributions to avoid maxing out to early.
   
4. High Earners: Know Your Options
   
   Some companies offer non-qualified plans to supplement their standard 401(k) offerings, typically for certain employees who exceed plan limits or hold specific roles. These plans allow for additional retirement savings opportunities, though they often come with different rules and considerations.
   
   If you’re in a higher income bracket or leadership position, it’s worth asking whether your company offers a non-qualified plans as part of your overall package.

The Bottom Line

An employer match is essentially free money for your future. But like any benefit, it’s only as valuable as your ability to access it.

By pacing your contributions, understanding your plan’s match structure, and staying proactive throughout the year, you can avoid one of the most common 401(k) mistakes and maximize your retirement savings.

The post Are You Missing Out on Your 401(k) Match Without Realizing It? appeared first on Odyssey Advisors, Inc.

Bottom Line Up Front

• If you have a full-time job and a side business with no employees, you can contribute to both a regular 401(k) and a Solo 401(k).
• Employee contributions are capped at $24,500 total across all 401(k) plans in 2026 ($32,500 if 50+ with catch-up).
• Employer contributions are separate for each plan – each employer can contribute up to $72,000, but this amount is reduced by any employee contributions made to that plan.
• If you contribute the full $24,500 as an employee, the maximum combined employer contributions across both plans would be $119,500, bringing the total possible contributions to $144,000 ($152,000 if 50+).

Absolutely! If you have a 9-to-5 with a company 401(k) plan and a side hustle with 1099 income, you might be leaving money on the table if you’re not using a solo 401(k). Many people don’t realize that having multiple income streams means you can also have multiple retirement plans – allowing you to stack contributions and maximize tax savings.

Unlike IRAs, which have a hard cap on contributions no matter how many you have, 401(k) plans work differently. Your side business opens the door to another retirement account, allowing you to save even more. The best part? You get to play both roles: employer and employee, meaning you can potentially sock away thousands more in tax-deferred (or tax-free, if Roth) savings. Let’s break down how it works.

Why Having Two Retirement Plans Can Be a Smart Move

Many people assume that if they have a 401(k) through their employer, they’ve maxed out their retirement contributions—but that’s not entirely true. If you also have a side business with a Solo 401(k), you have additional tax-advantaged savings opportunities. The key is understanding how the limits work.

A 401(k) has two types of contributions:

1. Employee Contributions: This is the portion you contribute from your paycheck or side business income. In 2025, the total employee contribution limit is $24,500 across all 401(k) plans ($32,500 if you’re 50+).
   
   
   • For example, if you contribute $10,000 to your employer’s 401(k), you can only contribute $14,500 more as an employee across either your employer’s plan or your Solo 401(k).
     
     
2. Employer Contributions (Profit-Sharing): This is where things get interesting. Employer contributions are separate for each plan because they’re based on each employer’s earnings.
   
   
   • Employer contributions are separate for each plan, meaning each employer can contribute up to $72,000, but this amount is reduced by any employee contributions made to the plan.
     
   • If you maximize employee contributions ($24,500), the combined employer contributions across both plans would be $119,500.
     

Unlike employee contributions, where the limit is shared across plans, the employer contribution limit applies separately to each plan – which is why a Solo 401(k) can be a powerful tool for increasing retirement savings.

Perks of Having Both a 401(k) and a Solo 401(k)

• Double the Savings Potential: While you’re limited on employee deferrals, employer contributions give you another bucket of tax-deferred savings. You get to wear both hats and can make contributions as both an employee and employer.
  
• Lower Your Tax Bill: Contributing more means reducing your taxable income from both your day job and side hustle.
  
• More Investment Choices: Employer-sponsored 401(k)s often have limited options, while solo 401(k)s can offer more flexibility, including real estate and alternative investments.
  
• Tax Planning Flexibility: You can choose a Roth or traditional for both plans, letting you balance taxable income now vs. tax-free withdrawals later.

Common Solo 401(k) Misconceptions

“If I max out my work 401(k), I can’t contribute to my Solo 401(k) at all.”

Not true. You can still make employer contributions from your self-employment income, even if you hit the employee limit at your day job.

“Solo 401(k)s are for full-time business owners.”

False! Even if your side hustle only brings in a few thousand dollars a year, you can still take advantage of tax-advantaged savings.

“I should just open a SEP IRA instead.”

Maybe, but Solo 401(k)s generally allow higher contributions at lower income levels because they let you contribute both as an employee and an employer. SEP IRAs only allow employer contributions.

Having two retirement plans isn’t just possible, it’s a smart strategy for anyone juggling a 9-to-5 and a side business. Next, let’s break down how to maximize your contributions without running into issues with the IRS.

Maximizing Contributions Without Overstepping IRS Rules

The key to maximizing contributions is understanding how the IRS limits apply across both plans. Here’s how to make the most of your retirement savings without accidentally contributing too much.

1. Know the Two Types of 401(k) Contributions
   
   There are two main types of contributions to be aware of:
   
   
   • Employe Deferrals: You can contribute up to $24,500 in 2026 ($32,500 if 50+) across all 401(k) plans combined.
   • Employer Contributions: Your employer (including your own business) can contribute up to 25% of your compensation from each job up to a total of $72,000 for each job (reduced by the amount of your employee contributions to that plan excluding the catch-up).
     
     
2. Max Out Your Employee Deferrals Wisely
   
   Since the employee contribution limit is shared between both plans, you’ll need to decide where to contribute first:
   
   
   • If your W-2 job offers a match, contribute there first to get free money.
   • Once you’ve maxed out your match, you can split additional deferrals between both plans or focus on the one with the better investment options and lower fees.
     
     
3. Use the Employer Contribution Loophole
   
   Even if you max out employee contributions at your W-2 job, your side business can still contribute to your solo 401(k) as an employer. Here’s how:
   
   
   • Sole Proprietorship / Single-Member LLC: Employer contributions are 20% of the net self-employment income (after deducting half of your self-employment tax).
   • S-Corp: Employer contributions can be 25% of your W-2 wages from the business (not total revenue). Remember that S-Corp dividends are NOT considered compensation for retirement plan purposes.
     
     
     
4. Consider Roth vs. Traditional Contributions
   
   If you expect higher income in retirement, Roth contributions (tax-free withdrawals later) might be better. If you want to lower your taxable income now, traditional (pre-tax) contributions make sense.
   
   You can mix and match: Roth for one plan, traditional for another.
   
5. Avoid Common IRS Pitfalls
   
   
   • Excess Employee Deferrals: You can contribute $24,500 to each plan (traditional, Roth, or combined). The limit is shared across every 401(k).
   • Miscalculating Employer Contributions: Employer contributions are separate, but they still can’t exceed 25% of your eligible earnings from each employer.
   • Missing the Tax Filing Deadline: Solo 401(k) contributions must be made by your business’s tax return deadline (including any extensions). A great tip? Set a calendar or phone reminder for when you want to contribute.
     
     
6. Track Contributions and Work with a Tax Pro
   
   401(k) rules can be complicated – especially with multiple plans. Keep a running total of contributions throughout the year and work with an accountant, TPA, or financial advisor to stay within IRS guidelines.

The Bottom Line

By strategically using both a Solo 401(k) and an employer-sponsored 401(k), you can maximize tax-deferred (or tax-free) savings, reduce your taxable income, and accelerate your retirement goals as both an employer and employee. It definitely pays to know your retirement plan options.

Keep in mind that you need to understand the difference between employee and employer contributions to avoid overstepping IRS rules. That’s why it’s important to work with an experienced retirement third-party administrator, financial advisor, or tax pro to ensure you’re making the most of your savings while staying compliant.

The post Can I have a Solo 401(k) and a Company 401(k)? appeared first on Odyssey Advisors, Inc.

Bottom Line Up Front

• An employer fiduciary is responsible for acting in the best interest of the 401(k) plan’s participants and beneficiaries, ensuring compliance with the Employee Retirement Income Security Act (ERISA) which sets the guidelines and regulations that employers must follow to fulfill their duties.
• The three key responsibilities of an employer fiduciary encompass carrying out administrative tasks, keeping 401(k) provider fees in check, and providing diversified quality investment opportunities.

If you’re a small business owner considering the implementation of a 401(k) plan for your business, it’s important to understand your responsibilities as a plan fiduciary, including compliance with the Employee Retirement Income Security Act (ERISA). As an employer fiduciary, your primary duty is to act in the best interest of the plan’s participants and beneficiaries, ensuring their well-being. This entails not only maximizing returns for the participants, but also adhering to ERISA compliance guidelines. While there are various fiduciary responsibilities, this article focuses on three key obligations that are essential for any small business owner venturing into the realm of 401(k) plans. 

Carry Out Administrative Tasks in a Timely Manner

There are numerous administrative tasks that are the responsibility of the employer fiduciary. One of the most crucial responsibilities is operating the 401(k) plan in accordance with the plan document. This includes ensuring deposits are made correctly and on time, as well as making sure any distributions are made in a timely fashion. Adhering to the plan document helps maintain consistency and ensure compliance with ERISA regulations.

Another important duty of the employer fiduciary is to keep track of employee eligibility and ensure that contributions are made once the employee becomes eligible to participate in the plan. It’s crucial to monitor eligibility criteria and notify employees of their eligibility (unless you have established automatic enrollment) to provide them with the opportunity to save for retirement.

The fiduciary must also make sure to maintain records in accordance with ERISA standards. Proper record-keeping is vital for demonstrating compliance with fiduciary responsibilities and providing transparency. It also helps come audit time.

Furthermore, you are also responsible for conducting any necessary plan testing, such as discrimination testing – this is normally outsourced to a firm like a Third Party Administrator (“TPA”). These tests are designed to ensure that the plan does not unfairly favor highly compensated employees over non-highly compensated employees. 

For detailed information on ERISA standards and regulations related to these administrative responsibilities, you can refer to the Department of Labor (DOL) website, which provides comprehensive guidance on ERISA compliance: Department of Labor – ERISA Compliance.

Keep 401(k) Fees in Check

Plan fees remain an important area of fiduciary oversight. Fiduciaries should regularly review both investment expenses and service provider fees to ensure they remain reasonable for the services provided. As a plan sponsor, you have the authority over plan assets meaning you decide which funds will be allowed or offered in the plan. You are expected to understand the fees that your 401(k) participants will incur based on their decisions. It’s important to weigh the benefits and the costs – your provider may offer many additional services and that may be desirable even at a higher cost. Fiduciaries can: 

• Determine the current costs being paid and to whom and request itemized documentation
• Compare fees charged by different providers

There are three different fees associated with a 401(k) plan which are administrative, investment, and consulting fees. By carefully monitoring and evaluating the fees, you can safeguard the long-term financial well-being of your plan participants.

Provide Diverse and Quality Investment Opportunities

ERISA doesn’t require fiduciaries to select the best-performing investments. Instead fiduciaries should establish a prudent process for selecting, monitoring, and replacing investments while offering participants a diversified lineup that meets the needs of the plan. Investment options should be reviewed regularly and evaluated against appropriate benchmarks and peers, not simply the highest-performing funds of the moment. 

To Wrap It Up

A fiduciary has many responsibilities in regards to a 401(k) plan. However at the root of all responsibilities is to act in the sole interest of the plan’s participants and beneficiaries. Employer fiduciaries must handle plan administration, try to limit fees, and offer diversified investment options in order to give provide participants with a well-managed retirement plan that’s operated in accordance with ERISA’s fiduciary standards. 

Although these responsibilities may seem daunting, there are experts in the field who will gladly help. Take the worry out of retirement plan administration and let Odyssey Advisors be your trusted partner in building and managing your company’s retirement plan. Our expert team will handle the complex responsibilities, so you can focus on what you do best. Say hello to peace of mind and contact us today!

Frequently Asked Questions About 401(k) Fiduciary Responsibilities

Who is considered a fiduciary of a 401(k) plan?

Under ERISA, a person may be considered a fiduciary based on the functions they perform for the plan, not simply their job title. This can include individuals who exercise discretionary authority over plan management or assets, provide investment advice for a fee, or have responsibility for plan administration. 

What are the main fiduciary duties under ERISA?

ERISA generally requires plan fiduciaries to act solely in the interest of plan participants and beneficiaries, carry out their duties prudently, diversify plan investments, follow the plan’s governing documents, and ensure the plan pays only reasonable expenses. 

Can a 401(k) fiduciary be personally liable?

Yes. Fiduciaries who breach their responsibilities under ERISA may be personally liable for losses to the plan resulting from the breach. This makes having—and documenting—a prudent fiduciary process especially important. 

Does ERISA require fiduciaries to choose the best-performing investments? 

No. Fiduciary prudence isn’t determined simply by which investment ultimately produces the highest return. Fiduciaries should follow a prudent process when selecting and monitoring investments based on the information reasonably available at the time of the decision. 

The post Top 3 Fiduciary Responsibilities Every 401(k) Plan Sponsor Should Know appeared first on Odyssey Advisors, Inc.

Bottom Line Up Front

• While the IRS believes a 401(k) plan “must be established with the intention of being continued indefinitely” many business owners terminate their plans each year.
• In order for the IRS to acknowledge that your plan is terminated you must establish a termination date, cease making contributions and notify all participants, and once all assets have been distributed, file a final Form 5500. 
• We recommend working with your financial advisor and actuary/TPA to terminate your plan.

According to the IRS, a 401(k) plan “must be established with the intention of being continued indefinitely,” but terminating a 401k plan is more common than you think. The IRS understands that while a 401(k) plan should be permanent, businesses face unforeseen circumstances, oftentimes outside of their control, which can lead to terminated plans. 

There are many reasons that lead to terminating a 401k plan. The company may be going out of business, it could be sold to another company, or it might have decided to switch to a different plan. Regardless of the reason, once the decision to terminate the plan has been made, there are a number of regulations the company must follow. 

Three Steps To Terminating a 401(k) Plan

As a plan sponsor and employer, there are three steps you must take to make sure the IRS considers your 401(k) plan terminated. 

1. The first step is to establish the termination date for the plan. This can be any date of your choosing, as long as the termination date or plan “freeze” date is amended into the plan document. You will also wish to have a Board Resolution to make clear the intent of the organization to freeze & terminate the plan. The plan must also be amended to reflect any law changes that will be implemented as of the plan termination date. 
   
   Filing a form 5310 with the IRS is a way to ensure that all necessary plan amendments have been made for plan termination, but it is not a necessary step. This process can be expensive and is often lengthy.

2. Once the termination date has been set, it is important to cease making contributions and notify all participants that the plan will be coming to an end. All plan members who have assets are to be updated to be 100% vested. This includes participants who have been recently terminated. 
   
   It is also important to provide resources to participants that provide insight into what they can do with their distribution. Participants typically roll over their distribution into a different qualified plan or Individual Retirement Account (“IRA”) or withdraw their money in cash subject to tax withholdings. 

3. All of the assets are typically distributed within one year after the date of plan termination. After all of the assets have been distributed you must file a final Form 5500. It is crucial that all of the assets be distributed when terminating the plan, otherwise, the IRS will recognize the plan as an active ongoing plan. If the plan balance remains greater than zero then the IRS will not recognize the plan as terminated and must continue to meet qualification requirements. Missing the final filing of Form 5500 can result in severe penalties by the IRS and Department of Labor.

Although it may seem daunting, hundreds (if not thousands) of plans are terminated each year. Not to mention that your actuary or TPA should be able to help you along the way, completing IRS forms as well as providing final benefit calculations. 

We don’t recommend taking on the task of terminating your Plan alone. While it seems simple, there are many obstacles and regulations in order to properly terminate the Plan, and failure to properly meet each step could result in significant penalties. You should consult your financial advisor and actuary/TPA. 

The termination process is time-consuming and complex. In the event that you require extra assistance, our team can guide your business through this difficult process. Feel free to contact us with any additional questions.

If you’re looking for another plan, take a look at our Retirement Plan Comparison Chart. 

The post Terminating a 401(k) Plan? Here’s What You Need to Know appeared first on Odyssey Advisors, Inc.

Bottom Line Up Front

• The IRS requires that most plans perform an annual nondiscrimination testing to determine whether or not all employees are treated equally as far as tax advantages and contributions go. 
• The nondiscrimination testing separates employees into two groups: non-highly compensated employees (NHCEs) and highly compensated employees (HCEs).
• To find out which employees are considered highly compensated employees, the IRS has two tests: an ownership test and a compensation test.

What is a Highly Compensated Employee?

Internal Revenue Service (IRS) Section 414(q) sets forth two tests to determine whether an employee is an HCE: an ownership test and a compensation test.  If you meet the standards of either of these tests, then you are deemed to be an HCE.

• Ownership test: Have you owned at least 5% of the sponsoring company at any point during the current or prior plan year?
• Compensation test: Did you receive compensation of at least a certain amount determined by the IRS ($135,000 for 2022 and $150,000 for 2023) in the prior plan year? This amount increases with inflation at $5,000 intervals.

If one is classified as a highly compensated employee then their plan contributions are limited because the IRS wants to ensure that contributions aren’t disproportionately benefitting HCEs over NHCEs. 

How to Identify if Someone is a Key Employee?

The IRS has three set tests to determine whether an employee is a Key Employee: a 5% ownership test, a 1% ownership test, and an officer test.  If you meet the standards of any of these tests, then you are deemed to be a Key Employee.

• 5% Owner test: Have you owned at least 5% of the sponsoring company at any point during the current or prior plan year?
• 1% Owner test: Have you owned at least 1% of the sponsoring company and did you receive compensation in excess of $150,000 for the current plan year? This dollar amount is set and does not increase with inflation.
• Officer test: Are you an officer of the sponsoring company and did you receive compensation in excess of an amount determined by the IRS ($200,000 for 2022 and 2023) in the current plan year? This dollar amount increases with inflation at $5,000 intervals.

How to Identify if Someone is an Owner?

Someone is deemed to be an owner if they have owned at least 5% of the sponsoring company at any point during the current or prior plan year.  This can mean different things under different company entity types.

• Corporation: The greater of the value of all classes of stock held by the individual as a total percentage of the value of the company, or the voting power of all classes of stock held by the individual as a percentage of all stock with voting rights.
• Partnership: The greater the percentage of the capital interest or profit interest.
• LLC or LLP: The percentage of membership interest out of the total membership interest.

Additionally, if you have the option to acquire stock, even if you have not exercised those options yet, they are also used to determine whether you are an owner or not.

What is Ownership Attribution and How Does It Work?

In short, if you are deemed to be an owner of the sponsoring company then your family members may be deemed to be owners of the sponsoring company as well.  Below is a chart to describe which family members have attributed ownership and which are not:

What Do These Different Designations Mean and Why Do They Matter to Me?

The name of the game is non-discrimination testing.  The IRS requires that most retirement plans perform a non-discrimination test every year. These tests are used to determine if the plan is disproportionately benefiting highly compensated employees over non-highly compensated employees (NHCEs).  If the plan fails these tests it can lose the tax deductions that it receives for the contributions made to the plan.

The Key Employees designation is used in determining if the plan is considered “top-heavy”.  A plan is considered top-heavy if the total account balances or total present value of accrued benefits is disproportionately attributed to Key Employees.  If a plan is deemed to be top-heavy it may be required to make minimum contributions to the plan for non-key employees.

The owner designation is important to keep in mind because of the attribution rules listed above.  When you are deemed to be an owner you are then deemed to also be a Key Employee and a highly compensated employee.  This can have a large effect on your non-discrimination testing.  The most common issue we see is that an owner will hire their child – if the plan design doesn’t explicitly address benefits paid to key employees, this may result in them receiving employer contributions or benefit allocations. Often, the owner’s child is one of the youngest employees at the company – so even if they are paid a very small amount they are still considered a highly compensated employee and can cause your non-discrimination tests to fail.

Whenever you’re ready, here are three ways we can help:

1. Business owners, get a free review of your current retirement plan design here.
2. Minimize your tax burden and secure your employees’ futures here.
3. Financial advisors, help your clients defer income while providing retirement benefits for their employees here.

The post How to Identify a Highly Compensated Employee appeared first on Odyssey Advisors, Inc.

Bottom Line Up Front

• A fiduciary financial advisor manages a client’s assets and provides financial advice while acting in the client’s best interest.
• Fiduciaries are legally obligated to disregard their interests to act in their clients’ best interests, avoid any conflicts of interest, and fully disclose any that may arise.
• There are two standards financial advisors may follow, the Fiduciary Standard and the Suitability Standard.

The word fiduciary originates from the Latin term Fiducia, which simply translates to “trust”. A fiduciary can be anyone who acts on someone else’s behalf. There are many examples of fiduciaries such as fiduciary financial advisors, bankers, business advisors, and attorneys. Understanding the difference between fiduciary and non-fiduciary financial advisors can be important to clarify your relationship’s parameters and maximize the return on your investments.

Understanding What a Fiduciary Is

When it comes to investing, not every financial professional is required to act solely to benefit their client. Luckily, some financial advisors choose to act under the fiduciary standard, a standard of practice put into place by the Investment Advisers Act of 1940. A fiduciary has a requirement to always put their client’s interests before their own. In some cases, breaking this fiduciary trust can result in large fines or even jail time.

The Three General Fiduciary Duties

While every state has its specific laws about fiduciary duties, there are three general duties that fiduciaries are required to follow (be aware that the SEC has issued new proposed rules on February 9, 2022):

1. Duty of loyalty. The duty of loyalty simply means that the fiduciary is tasked with always making the best decision for the client, and not for their gain. An example of this could be an executive at a company using confidential information for their gain, which would violate the duty of loyalty to the company and shareholders.

2. Duty of care. This duty dictates that fiduciaries use in-depth research and critical analysis to make informed decisions on the behalf of their beneficiaries.

3. Duty of good faith. Just researching all of the choices on behalf of the client isn’t enough to be considered a fiduciary. After using due diligence to thoroughly examine all of the possible options, the fiduciary is then required to choose the option that best serves the interests of the client.

Types of Fiduciary Relationships

Fiduciary relationships come in a variety of forms, but here are some common ones:

Lawyer and client

Since lawyers are entrusted with clients’ personal information, the relationship between them and their clients carries a considerable amount of trust. Lawyers bear a great deal of fiduciary responsibility and can be severely punished if they breach them. 

Board and shareholders

Members of a board are responsible for deciding the direction of the company. When it comes to making decisions on behalf of the company, the board members must act in the best interests of all shareholders. This means that they are required to explore every option that’s available to them before a final decision is made. 

Trustee and beneficiary

When someone is making arrangements on behalf of their estate or a trust, they must designate someone as a trustee. After the trust or estate trustee has legal control, it is then their responsibility to make decisions concerning the assets held in the trust or estate’s name, but they must ensure such decisions are in the best interest of the beneficiaries. 

Employers and employees

In a general sense, employers don’t hold fiduciary responsibilities when it comes to their employees. However, when an employer offers a retirement plan, they become a fiduciary for that plan. Under this relationship, employers must act solely in the best interests of plan participants using the prudent-person standard.

To relieve some of those responsibilities, employers can hire someone to share some of the fiduciary responsibilities, such as a third-party retirement service provider. 

Financial advisor and client

When someone starts working with a financial advisor, they give them access to and control of their money and investments. Some financial advisors have limited control over their client’s assets, which means that they can make decisions on their behalf, sometimes without approval. 

But not every advisor follows the fiduciary standard. There are actually two different standards that advisors can operate under and sometimes it’s not always clear which standard they’re working within. 

The Two Standards of Financial Advisors 

The Fiduciary Standard

Advisors who are Registered Investment Advisors (RIAs) must provide financial advice based on the Fiduciary Standard. This means that they must act in the client’s best interest at all times, avoid any conflicts of interest, and fully disclose any that may arise.

Also among the class of fiduciary financial advisors, are CFPs or Certified Financial Planners. Because there is a rigorous accreditation process, only a small fraction of advisors are CFPs. If you’re looking for a fiduciary advisor, every CFP is legally held to the Fiduciary Standard.

The Suitability Standard

Under the Suitability Standard, financial advisors can sell investment products to clients as long as those products match the financial situation of their clients. 

What’s the difference between Fiduciary and Suitability Standards?

The main difference between the Fiduciary and Suitability Standards is that the Suitability Standard does not require your advisor to act solely in your best interest.

Does that mean that all non-fiduciaries will only suggest their most personally lucrative options? Certainly not, the key difference is that the Suitability Standard only requires advisors to consider what is most suitable which may not completely align with the client’s objectives and risk profile. Under the Fiduciary Standard, the client’s needs must be entirely prioritized over the advisors’ own interests. 

Conclusion

If you are looking to hire a financial advisor, you need to start by ensuring that whoever you entrust with your assets is looking out for your best interests. Advisors that follow the Fiduciary Standard are obligated to act in the most beneficial way towards their clients. By working with a fiduciary, you are guaranteeing that your needs are being prioritized.

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Bottom Line Up Front

• Employee benefits are the additional perks, either tangible or intangible, that an organization offers on top of an employee’s salary as part of their total compensation package.
• Organizations are using these benefits to retain current employees, attract new talent, mitigate taxes, and increase morale.
• The most sought-after benefits in 2021 include increased healthcare, remote/flexible work options, childcare, and family benefits, and additional lifestyle benefits.

What are Employee Benefits?

Let’s start this from the top and define exactly what an employee benefits package is. Employee benefits packages are the additional perks, either tangible or intangible, that an organization offers on top of an employee’s salary.

Think back to when you were between the ages of 21 and 25 years old. That’s right around when you most likely got kicked off of your parent’s health insurance plan. For most of us, that was the first time you had to take a step back and look at your employer’s benefits package without the rose-colored glasses on.

The benefits offered vary from business to business. Some are required by law while others are voluntary. Employee benefits can also be used as a way for organizations to retain current employees, stand out from their competitors when trying to attract new talent, mitigate taxes, and increase morale.

The Basics

Most Commonly Offered Benefits

While some of these benefits are legally required, others are not. Here is a general list of the most common benefits offered in an employee benefits package:

• Health Insurance
• Retirement Savings Plan
• Additional insurance such as life and disability
• PTO for vacation, sick days, and personal days
• Remote/hybrid and flexible schedule options

Your workforce is what drives your business so that’s why many business owners want to offer benefits that will help recruit and retain top talent.

Legally Required Employee Benefits

As an employer in the United States, you’re required to participate in and contribute toward certain employee benefits. The Department of Labor describes these benefits as those that provide workers and their families with a retirement income and medical care, mitigate economic hardship resulting from loss of work and disability, and cover liabilities resulting from workplace injuries and illnesses.

These benefits include:

• Time off to vote, serve on a jury, and perform military service
• Provide worker’s compensation
• Social Security, Medicare, and FICA
• Unemployment insurance
• Family and Medical Leave (FMLA)
  • Private employers with 50 or more employees and all public sector businesses are required to provide a maximum of 12 weeks of unpaid leave in a 12-month period to be used as per the DOL.
• Health insurance
  • This is only required by businesses with 50 or more full-time employees

Voluntary Employee Benefits

Voluntary benefits, also known as supplemental benefits, are those offered by employers, typically used to entice and retain employees, mitigate taxes, and increase overall morale. These benefits can range from additional health coverage including vision and dental to lifestyle benefits or employee perks. They are typically cheaper through an employer since they can get reduced group pricing.

As mentioned above, you aren’t obligated to offer these supplemental benefits, but to stay competitive in the job market and retain your current employees, these benefits have become vital. Another benefit (pun intended) is that these benefits are another way to decrease your payroll taxes and increase job satisfaction.

Below is a list of common voluntary benefits offered today:

• Retirement savings plans (i.e. 401(k), Profit Sharing, 403(b), Cash Balance Plan)
• Hospital indemnity insurance
• Dental & Vision insurance
• Disability insurance
• Gym memberships
• Financial Management services
• Life insurance
• Remote and flexible work schedule
• Pet insurance

The list doesn’t end there.  Organizations are starting to get more creative to stay competitive in the job market and employees are placing greater emphasis on supplemental benefits as they consider changing jobs. One study revealed that 78% of employees say that their benefits packages are just as important as their salaries when it comes to keeping them at their current employer.

Most Valuable Benefits Employees are Looking For in 2022

There are a lot of benefit plans out there so how do you know what your employees will be looking for? Since the pandemic, there has been a momentous shift in how both employees and employers look at benefits.

Many believed that employers would decrease their benefits, but that wasn’t the case. According to a recent study conducted by Unum, employers are wanting to add additional benefit packages to protect their employees after seeing what the pandemic has done. They’ve seen disability, critical illness, and viral/infectious disease coverage as the most frequently listed benefits that businesses were adding because of the pandemic.

According to the Employee Benefit Research Institute’s (EBRI) 2020 Workplace Wellness Survey, seven out of ten employees agreed that they need their employer’s help ensuring they are healthy and financially secure. They also felt that employer-offered benefits contribute to their feelings of financial security.

#1 Health Insurance

The Society for Human Resource Management (SHRM) found that healthcare is consistently ranked as the most important benefit category. They found that Preferred Provider Organization (PPO) plans are the most popular health insurance options, followed by high-deductible health plans (HDHPs).

According to their study in 2019, 85% of employers offer PPO, and 59% percent of employers offer HDHP linked to a health savings account (HSA)/health reimbursement account (HRA).

There are also more voluntary health insurance options that you can offer to supplement your standard health insurance plans such as:

• Accidental death & dismemberment (AD&D)
• Dental & vision
• Hospital indemnity
• Long-term disability
• Short-term disability
• Accident coverage
• Critical illness
• Mental health coverage

When you provide your employees with well-rounded health benefits, it’s been shown that they’ll take fewer sick days, feel more satisfied with their job, and gain a sense of security which leads to more productivity and better profit margins.

#2 Remote and Flexible Work Schedules

Before the pandemic, remote and flexible work schedules were heard throughout the grapevine, but no one put much thought into it. It was similar to the gossip of a 4-day workweek. You’d hear about it from a friend of a friend or come across a news article about some progressive company testing the waters, but it was this far-fetched idea.

Now, most employees have gotten a taste of it as states issued stay-at-home orders during the pandemic. As the country is opening back up, more employees are requesting that remote and flexible work schedules become the norm.

According to a study conducted by Mercer, 87% of employers say they will embrace greater flexibility post-pandemic – with most planning to maintain the hybrid model of onsite/work-from-home options. It’s important to note that not all of these options are feasible for every organization. If you’re considering remote or flexible work options, make sure to assess your organizational needs along with your employees’ needs to determine if there’s a reasonable option that works for both parties.

#3 Childcare and family benefits

Many working parents juggled jobs and childcare during the pandemic. When schools closed and classes became virtual, many had to pivot when and where they worked or take a leave of absence to stay home with their children. Data gathered by Pew Research showed that almost double the number of women vice men quit the labor force in the first year of the pandemic. 2.4 million women and 1.8 million men left the workforce between February 2020 and February 2021.

Many organizations noticed this trend and have responded by increasing childcare and family benefits to mitigate the loss of skilled employees. Some of these benefits include:

• Backup care
• On-Site child care
• Eldercare
• Flexible Schedules
• Flexible childcare spending accounts
• Childcare subsidies
• Additional paid parental leave

#4 Lifestyle Benefits

Lifestyle benefits, also known as employee perks, are non-salary-related benefits that are given to employees to improve their lifestyles. Unless you’ve been living under a rock, you’ve heard about Google’s infamous employee perks. Things like free gourmet food and snacks, being able to bring your pets to the office, massage credits, extended maternal and paternal leave, increased death benefits for spouses, free fitness classes, gym memberships – and the list goes on.

These benefits provide employers an edge in how they differentiate themselves from competitors in the job market. They’ve also been proven to increase employee engagement, retention, and satisfaction. They provide a way to personalize your organization’s employee experience.

How to Showcase Your Employee Benefits Package

Share your policies, perks, and procedures when you’re interviewing a new candidate. When you make a job offer, add the benefits to the offer letter as part of their total compensation package. This is a great way to showcase the complete value of what you’re offering. Yes, you can include numbers! You can even do this with your current employees on an annual basis. Include everything that is part of your compensation package – health insurance, dental, salary, paid leave, retirement benefits, flexible spending accounts, etc.

Snap a picture of everyone sitting down for lunch together that you provided and share it on your LinkedIn, incorporate direct quotes or short videos from your employees about the support these benefits bring them whether that’s through their personal goals, their health, being able to care for loved ones without worrying about their job, etc. Everyone loves a good story and this is the perfect way to showcase your company culture and the benefits of working there.

Conclusion

Recruiting and retaining top talent requires a competitive, top-tier benefits package, more so now than ever before. Make sure your employee benefits are meeting your employees’ basic needs and then ask them what they would like to see more of. An anonymous survey is a great way to give your employees a safe space to open up. Do your research on the market, look at what your competitors are offering, and take into account what your employees would like.

Benefits shouldn’t be viewed as another expenditure – rather, think of them as an insurance policy for your business and your employees. With the pandemic (mostly) behind us and the increasing pressure from the great resignation, now is the time to start reevaluating the benefits you already offer.

If you have any questions or need further information, please reach out to one of our Odyssey consultants. We’d be happy to help.

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KEY POINTS

• The 3 most popular employer-sponsored healthcare accounts you can supplement your current healthcare insurance with are Flexible Spending Accounts (FSA), Health Savings Accounts (HSA), and Health Reimbursement Accounts (HRA).
• FSAs, HSAs, and HRAs all offer tax-free savings that you can use to pay for eligible medical, dental, vision, and sometimes long-term care expenses. 
• The bottom of this article includes an in-depth table comparing the three accounts.

Good healthcare insurance is an important benefit that many employees look for. In addition to insurance, many employers offer supplemental plan options. In this article, I’m going to cover the key differences between the 3 most popular employer-sponsored accounts: Flexible Spending Accounts (FSA), Health Savings Accounts (HSA), and Health Reimbursement Accounts (HRA).

Flexible Spending Account (FSA)

FSAs are employer-owned, but employee-funded accounts that can be used to pay for any eligible healthcare costs that aren’t covered by your healthcare insurance. They’re available to anyone with a healthcare plan that includes them. You can make contributions to the account pre-tax (subject to a yearly IRS limit), but you can only rollover $550 to the next year. You’ve probably seen the advertisements at the end of the year reminding people to use their FSA funds before they expire. Upon termination of employment, any unused funds left in your FSA will most likely be forfeited back to the employer.

Health Savings Account (HSA)

HSAs are for anyone that has a qualifying high deductible plan (for 2022, an HDHP has an annual deductible of at least $1,400 for single and $2,800 for family coverage). Like FSAs, contributions can be made pre-tax. Unlike FSAs, however, the account belongs to you and can be transferred to your next job. Additionally, funds do not expire at the end of the year and can even be invested within the account. If funds are withdrawn for non-qualifying expenses, they’re subject to income tax (as well as an additional 20% penalty if you are under the age of 65).

Health Reimbursement Account (HRA)

HRAs are not owned by the employee, nor does the employer contribute to the plan — which means no portability when your employment is terminated. HRAs can be used in conjunction with both FSAs and HSAs. When paired with an HSA, the HRA can only be used for either dental or vision benefits or strictly for amounts over your deductible. After age 65, HRA contributions can be used to pay premiums (health, dental, vision, and long-term care) for the primary participant. 

FSA vs HSA vs HRA Comparison Table

Many factors determine what health plan is right for you and what supplemental plans might be most beneficial. When comparing FSA vs HSA, HRA vs HSA, or FSA vs HRA, it’s important to consider each plan with your particular circumstances. If you’re thinking about adding an FSA, HRA, or HSA plan to your health insurance, you can talk with your insurance provider or reach out to one of our Odyssey Consultants to determine if any of these might be a good fit for you and your specific needs.

Interested in learning more?

• Pension Contributions at Risk due to COVID-19
• Ways to Reduce Your Taxable Income & Save Money
• 2020 Year-End OPEB Trend Report

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