Employer Retirement Plans
401(k) and Profit Sharing Plan
This is a defined contribution plan and is an employee benefit. It allows the employees to save on a systematic, tax preferred basis for retirement. A plan can be designed to fit the goals and objectives of the employer. The contributions of employees who participate in the plan through salary deferral can be on a pre-tax basis or after tax basis. Either way, the election is an advantage to the employer because the employer does not have to pay payroll taxes on all contributions, which can be a huge tax savings for an employer. The monies grow either tax-deferred (traditional 401(k)) or tax-free (Roth 401(k)). In addition, the owner/employer can also participate in plan and save for retirement.
There are nine (9) categories to consider for qualified plan management services, and our financial advisors can help in all areas.
- Plan Design, Review and Benchmarking
- Vendor Management
- Compliance Management and Advisory
- Third Party Administrator Management
- Investment Committee Support
- Employee Education Program
- Ongoing Plan Analysis
- Vendor Search
- Conversion Management (When Appropriate)
The owner/employer can also elect to make a Profit Sharing contribution (discretionary) on behalf of the employees if the company makes a profit in any given year. Employers sometimes reward the employees for their hard work and commitment throughout the year.
There are several different types of plan designs for the 401(k) Plan. Each plan is for certain types of entities and can be set up to accomplish the employer’s goals and objectives.
- Standard 401(k) Plan - Generally adopted by Corporations, Partnerships, Limited Liability Companies.
- Solo 401(k) Plan - Generally adopted by Sole Proprietors, Partnerships, Limited Liability Companies and Corporations with no common law employees.
- Safe Harbor 401(k) Plan - Generally adopted by Sole Proprietors, Partnerships, Limited Liability Companies and Corporations.
- Super Comparability 401(k) Plan - Generally adopted by Sole Proprietorships, Partnerships, Limited Liability Companies and Corporations.
Defined Benefit Plans
Defined Benefit Plans (DB) is for more established companies and professionals who are earning a significant income. Given the right demographics, a defined benefit plan can provide both tax savings and financial security that effectively reward the hardworking, well-compensated business owner, as well as long-term employees.
Many mature companies have experienced owners who are in the 35% federal income tax bracket. This favorable type of plan may allow the owners to make TAX DEDUCTIBLE contributions that may be in excess of $100,000 depending on age and income. A plan implemented now will impact the current year federal income taxes.
Defined Benefit Plans base the annual contribution on the amount needed to fund the future benefit of each participant. Actuarial tables are used to determine the future accumulated benefits each participant will be entitled to receive. These DB Plans allow the highest paid and the oldest employees (often the owners) to make larger annual contributions than would be allowed under defined contribution plans. For example, the tax code allows a participant of a DB Plan with an annual income of $240,000 per year to accumulate approximately $2 million dollars¹ of retirement dollars in the future. As owners generally are the highest paid employees, the typical DB Plan will greatly benefit the owner(s).²
SIMPLE IRA and Other Plans
When a new business starts, it is often burdened by debt and may not have significant disposable income. Still it should establish some form of retirement plan to begin saving for the future.
A Simplified Employee Pension Plan (SEP) is often set up for self-employed owners who operate a business with a limited number of employees (perhaps one or two). Under this type of plan, the owner is generally allowed to make a tax-deductible contribution of up to 25% of compensation (maximum of $50,000 in year 2012) for each eligible employee. Bear in mind, the percentage of salary the owner contributes to his own plan must also be contributed for each eligible employee. This may get quite expensive if the business grows.
A SIMPLE (Savings Incentive Match Plan for Employees)IRA allows employers and employees to defer up to $11,000 (for tax year 2012) annually. The owner/employer is required to match the amount contributed by the employee from 1% to 3% of salary. Thus, the required contribution to each employee’s plan is lower than that made with a SEP. Though the employee related costs have been reduced under this plan, many owners will find the annual deferral to be less than adequate to support their own retirement.
A 403(b) or 403(b) 7 Plan is now very similar to a standard 401(k) Plan. It also is a defined contribution plan designed primarily for non-profit organizations, such as schools, hospitals, governmental agencies and 501(c) 3 organizations. These types of plans are generally provided by insurance companies and Mutual Fund companies.
A 457 Plan is also a defined contribution plan similar to a 401(k) Plan where an employee can defer salary on a tax preferred basis. This type of plan is generally for railroad companies, governmental agencies such as fire departments, municipalities, and some non-profit organizations. Contribution limits are similar to 401(k) Plans.