Retirement Plans for Business

Employers establish retirement plans with various goals in mind.

Retirement plans are used as part of the overall benefits package:

  1. To recruit and retain employees. 
  2. To reduce the employer's tax liability. 
  3. Provide employees tax advantaged savings and investments. 

​Commonly employers seek to satisfy one set of business concerns at plan inception but find as time goes on, their initial concerns change. Fortunately, your retirement plan can change as your needs change. 

Working with employers to establish and update retirement plans for over 20 years, we have the experience of working with investment providers and plan administrators to help meet your ever changing needs. 

Setting Up a Qualified Plan

To establish a qualified retirement plan, you must meet certain requirements of the tax law.

The employer, as plan sponsor, is responsible for establishing and maintaining the plan for the benefit of plan participants.

  • You must adopt a written IRS-approved plan. 
  • You arrange how the plan's funds will be used to build its assets.
  • The IRS sets limits on contributions each year for plan participants.
  • There are also limits on the amount you can deduct.
  • Your plan must provide that contributions or benefits cannot exceed certain limits.
  • The limits differ depending on whether your plan is a defined contribution plan or a defined benefit plan.
  • You can offer participants a choice to contribute part of their compensation to the plan rather than receive the compensation in cash as an “elective deferral”.
  • We recommend you work with a specialty firm(s) to assist in the administration of your plan to keep it in compliance with the various regulations and reporting requirements.
  • You are responsible for monitoring the plan for the benefit of participants.   

Defined Contribution Plan

  • Defined contribution plans provide individual accounts for each plan participant.
  • Benefits are based on the amount contributed to a participant's account.
  • Benefits are also affected by income, expenses, gains, losses, or forfeitures allocated to a participant. 
  • Contribution limits available to participants are based on IRS guidelines and set annually.
  • Employer contributions may be subject to vesting. 

Profit Sharing plan.  

  • While it's called a “profit-sharing plan,” firms don't actually need "business profit" for the plan year to make a contribution.
  • Profit-sharing plans allow "discretionary" employer contributions - the amount contributed each year isn't fixed. In fact, the employer can make no contributions for a given year if necessary. 
  • The plan must provide a definite formula for allocating contributions to participants and for distributing funds to employees after they reach a certain age or certain other occurrences. 
  • In general, employers can be more flexible in making contributions to a profit-sharing plan than to a money purchase plan.

Money Purchase plan. 

  • Contributions to a money purchase pension plan are fixed and are not based on your business profits.
  • The plan requires contributions without regard to whether the employer had profits.
  • Money Purchase plans allow larger contributions than Profit Sharing plans. 

(source IRS.Gov Publication 560)

 

401(k) plan. 

  • A 401(k) plan allows employees to have their employer contribute a portion of their wages to the plan on a pretax basis.
  • Elective contributions are not subject to income tax withholdings at the time of deferral and are not included in the taxable wages on your form W-2.
  • They are included as wages subject to Social Security, Medicare, and Federal Unemployment Taxes.
  • The amount that an employee may elect to defer to a 401(k) plan is limited by the Internal Revenue Code. 
  • Additional contributions may be made if a participant is over the age of 50. 
  • Distributions from a 401(k) plan may qualify for favorable distribution treatment or rollover treatment as long as they meet the respective requirements.
  • Plans may allow employees to make a hardship withdrawal because of immediate and heavy financial needs.
  • 401(k) plans are paired to other defined contribution plans (profit sharing and/or money purchase).
  • Employers may elect contributions to active deferring participants via matching contributions.
  • Employer contributions may be subject to vesting; while employee deferrals are always fully vested.    

(source IRS.Gov topic 424)

 

Defined Benefit Plan

A defined benefit plan is any plan that is not a defined contribution plan. Contributions to a defined benefit plan are based on what is needed to provide definitely determinable benefits to plan participants within guidelines established by the Internal Revenue Service annually. Actuarial assumptions and computations are required to figure these contributions. Generally, you will need continuing professional help to have a defined benefit plan.

(source IRS.Gov Publication 560)

If you establish a defined benefit plan:

  • You can have other retirement plans.
  • You can be a business of any size.
  • Need to annually file a Form 5500 with a Schedule B.
  • Need an enrolled actuary determine the funding levels and sign the Schedule B.
  • Benefits cannot be retroactively decreased but may be subject to vesting.
  • Benefits are not dependent on asset returns.

 Pros and Cons of Defined Benefit Plans:

  • Significant benefits possible in a relatively short period of time.
  • Employers can contribute (and deduct) far more than under other retirement plans.
  • Plan provides a predictable benefit.
  • Plan can be used to promote certain business strategies by offering subsidized early retirement benefits.
  • Defined Benefit Plans tend to have higher adminstrative costs and complexity.
  • An excise tax applies if the minimum contribution requirement is not satisfied.

source: www.irs.gov/retirement/article/0,,id=108950,00.html

IRA Based Retirement Plans

SIMPLE IRA

If you had 100 or fewer employees who received at least the minimum qualifying SIMPLE IRA compensation last year, you can set up a SIMPLE plan.

  • SIMPLE IRA plans allow employees to choose to make salary reduction contributions rather than receiving these amounts as part of their regular pay.
  • In addition, you will contribute matching or nonelective contributions.
  • Any employee who received the minimum qualifying SIMPLE IRA compensation during 2 years preceding the current calendar year and is reasonably expected to receive at least the minimum qualifying SIMPLE IRA compensation during the current calendar year is eligible to participate.
  • Compensation for employees is total compensation from the employer subject to federal income tax withholdings. Compensation also includes the employee's salary reduction contributions made under this plan.
  • If you are self-employed, compensation is your net earnings from self-employment before subtracting any contributions made to the SIMPLE IRA plan for yourself.

You can set up a SIMPLE IRA plan effective on any date from January 1 through October 1 of a year, provided you did not previously maintain a SIMPLE IRA plan. This requirement does not apply if you are a new employer that comes into existence after October 1 of the year the SIMPLE IRA plan is set up.

If you adopt a SIMPLE IRA plan, you must notify each employee of the following information before the beginning of the election period:

  1. The employee's opportunity to make or change a salary reduction choice under a SIMPLE IRA plan.
  2. Whether the employer will make matching contributions or nonelective contributions.
  3. Employer contributions are subject to full, immediate vesting.
  4. A summary description provided by the financial institution.
  5. Written notice that his or her balance can be transferred without cost or penalty if they use a designated financial institution.

The election period is generally the 60-day period immediately preceding January 1 of a calendar year (November 2 to December 31 of the preceding calendar year). A SIMPLE IRA plan can also provide longer periods for permitting employees to enter into salary reduction agreements or to modify prior agreements. Similarly, a SIMPLE IRA plan can provide quarterly election periods during the 30 days before each calendar quarter, other than the first quarter of each year.

Employers must make the salary reduction contributions to the SIMPLE IRA within 30 days after the end of the month in which the amounts would otherwise have been payable to the employee. Matching contributions or nonelective contributions must be made by the due date (including extensions) for filing your federal income tax return for the year.

SIMPLE IRA plan contributions are not subject to federal income tax withholding, however, salary reduction contributions are subject to Social Security, Medicare, and federal unemployment (FUTA) taxes.

SIMPLE IRA plan can permit participants who are age 50 or over to also make catch-up contributions. 

Contributions are made up of salary reduction contributions and employer contributions. You, as the employer, must make either matching contributions or nonelective contributions.

Employers are generally required to match each employee's salary reduction contributions on a dollar-for-dollar basis up to 3% of the employee's compensation. Alternatively, employers can choose to make nonelective contributions of 2% of compensation on behalf of each eligible employee who has at least the minimum qualifying SIMPLE IRA compensation for the year. Employers selecting nonelective contributions must provide contributions to all eligible employees whether or not an employee chooses to make salary reduction contributions. If you choose this 2% contribution formula, you must notify the employees within a reasonable period of time before the 60-day election period for the calendar year.

  • Distributions from a SIMPLE IRA are subject to IRA rules and generally are includible in income for the year received.
  • Tax-free rollovers can be made from one SIMPLE IRA into another SIMPLE IRA.
  • A rollover from a SIMPLE IRA to a non-SIMPLE IRA can be made tax free only after a 2-year participation in the SIMPLE IRA plan.
  • Distributions from a SIMPLE-IRA must begin by April 1 of the first year after the calendar year in which the participant reaches age 70½.
  • Early withdrawals (before age 59 1/2) are subject to a 10% additional tax. However, the early withdrawal tax is increased to 25% if funds are withdrawn within 2 years of beginning participation.

(source IRS.Gov Publication 560

 

 

 

SEP plans 

SEPs offer a simple method to make retirement plan contributions for you and your employees.

  • A SEP is a written plan that allows you to make contributions for you and your employees' retirement without getting involved in a more complex qualified plan.
  • You adopt a SEP agreement and make contributions directly to a traditional individual retirement account (SEP-IRA) you set up for you and each eligible employee. 
  • A SEP-IRA is owned and controlled by the employee and you make contributions to the financial institution where the SEP-IRA is maintained.

SEP-IRAs are set up for, at a minimum, each eligible employee. An eligible employee is an individual who meets the following requirements:

  • Has reached age 21.
  • Has worked for you in at least 3 of the last 5 years.
  • Has received the minimum qualifying SEP compensation from you.

You must execute a formal written agreement to provide benefits to all eligible employees under a SEP. You can satisfy the written agreement requirement by adopting an IRS model SEP using Form 5305-SEP You can set up a SEP for any year as late as the due date (including extensions) of your income tax return for that year.

Contributions you make for to a common-law employee's SEP-IRA cannot exceed the lesser of 25% of the employee's IRS maximum SEP compensation or the IRS SEP contribution maximum. Contributions made to employees are subject to immediate full vesting. 

If you are self-employed, you can deduct the contributions you make each year to your own SEP-IRA, however you must make a special computation to figure your maximum deduction for these contributions. 

(source IRS.Gov Publication 560)