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what is your objective?
Ask yourself: or, if you do not have a plan, Many employers have retirement plan objectives but do not realize that a plan can be designed to meet your goals. A 401(k) plan with a matching contribution is not the answer to every employer's retirement plan needs. We assess your employee demographics as well as your goals in order to provide you with retirement plan options. We believe that our retirement plans should provide you with alternatives not ultimatums. plan types There are a variety of employer-sponsored retirement plans. We have defined the major classifications of retirement plans below. qualified retirement plans 401(k) Plan Profit Sharing Plan Money Purchase Plan ESOP Defined Benefit Plan Non-qualified retirement plans SEP SIMPLE-IRA See below for explanations of plan types. 401(k) Plans Traditional 401(k) Plans A 401(k), provided by this section of the IRS code, allows employees to defer a portion of their salary on a pre-tax basis to a retirement savings account. These deferrals are withdrawn through payroll deductions and remitted to the plan by the employer. In addition to the employee contributions, the employer is allowed to make tax-deductible contributions on behalf of the employees. These contributions could be matching or profit sharing contributions. Typical employers with these plans have the following objectives:
An advantage of the 401(k) is that they are very popular with employees. Employers are able to use these plans to recruit and retain employees. However, the disadvantage is a series of nondiscrimination tests that must be passed each year . These tests must be completed by a competent third party administrator, such as Resource Benefits Administrators. Safe Harbor 401(k) Plan Many employers have difficulties passing certain nondiscrimination tests. The safe harbor 401(k) plan was established to provide the employer an alternative to satisfying these tests. Employees benefit by receiving guaranteed employer contributions, while highly paid employees are no longer restricted to the deferral rates of the non-highly paid employees. The guaranteed employer contributions and immediate 100% vesting is an attractive feature to prospective employees. An employer electing to use this option can avoid certain testing if specific requirements are met:
Solo 401(k) Plan Until the enactment of recent tax legislation, it was not advantageous for self-employed individuals with no employees to establish a 401(k) plan. The tax laws that dictate the deduction limits for retirement plan contributions did not allow plans to exclude amounts withheld from employees' wages as pre-tax deferrals from the total contributions deductible for tax purposes. However, the 2001 tax law changed this regulation and the Solo 401(k) was born. Solo 401(k) plans allow self-employed individuals with no employees the opportunity to pre-tax defer up to $12,000 (indexed) ($14,000 if over 50) to a 401(k) plan and make a profit sharing contribution up to 25% of compensation to the plan as well. Hence, allowing a $100,000 Schedule C taxpayer to receive a contribution up to $29,056 instead of $17,056. Profit Sharing Plan A Profit Sharing Plan allows employers to make tax deductible contributions on behalf of their employees. The amount contributed each year is discretionary and does not depend on the revenue of the business. This type of plans works best for companies that want:
An in depth discussion of the different types of profit sharing plans are provided below: Traditional Profit Sharing Plan The traditional profit sharing plan allocates a set percentage of the profit sharing contribution to the participants' accounts in proportion to the amount of compensation you earn from the employer. For example, an employee who makes three percent of the total wages paid by the company to participants will receive three percent of the contribution. This method is preferred in companies that have an owner or group of owners that do not earn over the social security wage base. These plans are also prevalent in non-profit organizations. Integrated Profit Sharing Plan The Integrated Profit Sharing Plan was established to allow employees who receive over the social security wage base additional contribution to subsidize their retirement accounts for payments not made to social security. This plan option is primarily used in companies with younger, higher paid owners or key employees. Age-Weighted Profit Sharing Plan An age-weighted profit sharing plan has many benefits for companies who have higher paid, older owners or key employees. This method assigns a point system to each person based on his/her age and compensation. The total points for a participant are divided by the total points of all participants. This yields a percentage which is applied to the contribution to determine the allocable amount to the participant. These plans do not work well in companies with younger owners or key employees or in companies with a workforce that is relatively the same age as the owner. These plans must be monitored for effectiveness because in many family-owned businesses these plans are not advantageous for the second generation. New Comparability Profit Sharing Plan A new comparability profit sharing plan benefits consistently profitable companies who have owners with large salaries and are at least ten years older than the majority of the employees. This plan allows the employer to choose a contribution percentage for each classification of employees. These classifications are determined by the employer when the plan is established. These classifications range from generic groups such as highly compensated and non-highly compensated employees to Owner A, Owner B, Managers, & Other Employees. Each year the employer is allowed to choose what percentage is applied to each classification. The IRS requires that he plan perform special nondiscrimination tests to ensure the fairness of the contribution percentages chosen each year. One guideline required by the IRS is that all classifications, which contain highly compensated employees, must receive a contribution of five percent or no less than one third of the highest percentage received by a highly compensated employee. Although these plans have many specialized test, they are very advantageous to many small employers. These plans allow the owners and employees of small businesses to receive comparable benefits to a pension plan without the expenses and required funding each year. Money Purchase Plan A money purchase plan is similar to a profit sharing plan with two important exceptions:
Employee Stock Ownership Plan ("ESOP") The ESOP was established to allow a retiring business owner a way to sell his business, defer some tax on the sale, and have the company buy it back from him. There are two types of ESOPs, leveraged and non-leveraged. In a leveraged ESOP, the plan may take a loan to pay off the owner for the stock in the company, then allocate the stock to employees as the plan repays the loan. The selling owner is eligible for deferral of the taxable gain on the sale of the business, if the ESOP owns at least 30% of the business. General steps of a leveraged ESOP are:
A company can benefit from these types of plans as the employees' ownership gives them an attachment to the company and its profitability. These plans are typically established by larger companies with many shares of outstanding stock. Defined Benefit Plan The Defined Benefit Plan is the traditional pension plan that was popular in the early existence of retirement plans. These plans allow for a company to provide a guaranteed retirement pension to their employees. These plans have funding methods that calculate an employee's exact pension at retirement based on years of service, age and compensation. These plans are required to be funded each year based on the minimum required contribution calculated by an actuary. These plans are ideal for smaller employers with large cash flows for many years. Non-qualified retirement plans Simplified Employee Pension (SEP) A Simplified Employee Pension plan allows small employers to establish an IRA for all employees who have worked for the company a specified time period not to exceed three years. The employer can contribute up to 25% of compensation for all eligible employees. The employees are allowed to take distributions at any time. Since the contributions are made to an IRA, SEP's are attractive because they are simple and avoid the filing requirements and nondiscrimination testing. However, they also significantly limit the employer's options and are the least flexible retirement plan. Savings Incentive Match Plan for Employees (SIMPLE) SIMPLE's are a 401(k)-like plan that do not require the nondiscrimination tests or the tax filing of qualified plans. The SIMPLE is similar to a 401(k) plan but with lower contribution limits. This plan allows employees to defer $8,000 (indexed) annually and the employer MUST either match the first 3% of pay the employees defer, or contribute 2% of their entire compensation for all eligible employees regardless of whether they are currently deferring or not. These plans are very beneficial for small employers with owners that have low to moderate compensation. Like the SEP, all contributions are 100% vested and can be withdrawn from the account at any time. However, a participant must pay a penalty if the funds are withdrawn before the completion of two years. These plans are mutually exclusive which means the employer may not maintain any other plan. |
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