Retirement Plans for Small Businesses

If you're self-employed or own a small business and you haven't established a retirement savings plan, there are numerous options which you and your employees may appreciate. A retirement plan can help you and your employees save for the future.  And you'll be in good company--over 1 million small businesses with 100 or fewer employees currently offer workplace retirement savings plans.

We will provide a FREE feasibility study to see if a plan fits your situation.  All that is needed from you is a census of employees of the firm.

Tax advantages

A retirement plan can have significant tax advantages:

·         Your contributions may be deductible when made

·         Your contributions aren't taxed to an employee until distributed from the plan

·         Money in the retirement program grows tax deferred (or, in the case of Roth accounts, potentially tax free)

·         You may be able to claim a tax credit equal to 50% of the cost to set up and administer a retirement plan, up to a maximum of $500 per year for each of the first three years of the plan.

Types of plans

Retirement plans are usually either IRA-based (like SEPs and SIMPLE IRAs) or "qualified" (like 401(k)s, profit-sharing plans, and defined benefit plans). Qualified plans are generally more complicated and expensive to maintain than IRA-based plans because they have to comply with specific Internal Revenue Code and ERISA (the Employee Retirement Income Security Act of 1974) requirements in order to qualify for their tax benefits. Also, qualified plan assets must be held either in trust or by an insurance company. With IRA-based plans, your employees own (i.e., "vest" in) your contributions immediately. With qualified plans, you can generally require that your employees work a certain numbers of years before they vest.  An attractive alternative to IRA and 401K type plans is the utilization of a permanent life policy which avoid market volatility of  IRA/401K’s and has favorable tax rules.

Which plan is right for your business?

With a broad array of retirement plans to choose from, each with unique advantages and disadvantages, you'll need to clearly define your goals before attempting to choose a plan.  There are many exciting ways to design a retirement plan. With the right combination of features, plans can be designed to provide a great benefit to employees, while keeping employer cost requirements to a minimum.  We will review your goals and objectives to design the plan that meets your unique needs. Whether your goals are employee recruitment and retention or maximizing the benefits to key employees, we can help you select the right plan for your company.

For example, do you want:

·         To maximize the amount you can save for your own retirement?

·         A plan funded by employer contributions? By employee contributions? Both?

·         A plan that allows you and your employees to make pretax and/or Roth contributions?

·         The flexibility to skip employer contributions in some years?

·         A plan with the lowest cost? Easiest administration?

The answers to these questions can help guide you and your retirement professional to the plan (or combination of plans) most appropriate for you.

Simplified employee pension (SEP) plan

A SEP allows you to set up an IRA (a "SEP-IRA") for yourself and each of your eligible employees. You contribute a uniform percentage of pay for each employee, although you don't have to make contributions every year, offering you some flexibility when business conditions vary. For 2012, your contributions for each employee are limited to the lesser of 25% of pay or $50,000. Most employers, including those who are self-employed, can establish a SEP.  SEPs have low start-up and operating costs and can be established using an easy two-page form. The plan must cover any employee aged 21 or older who has worked for you for three of the last five years and who earns $550 or more.

SIMPLE IRA plan

The SIMPLE IRA plan is available if you have 100 or fewer employees. Employees can elect to make pretax contributions in 2012 of up to $11,500 ($14,000 if age 50 or older). You must either match your employees' contributions dollar for dollar--up to 3% of each employee's compensation--or make a fixed contribution of 2% of compensation for each eligible employee. (The 3% match can be reduced to 1% in any two of five years.) Each employee who earned $5,000 or more in any two prior years, and who is expected to earn at least $5,000 in the current year, must be allowed to participate in the plan.  SIMPLE IRA plans are easy to set up. You fill out a short form to establish a plan and ensure that SIMPLE IRAs are set up for each employee. A financial institution can do much of the paperwork. Additionally, administrative costs are low.

Profit-sharing plan

Typically, only you, not your employees, contribute to a qualified profit-sharing plan. Your contributions are discretionary--there's usually no set amount you need to contribute each year, and you have the flexibility to contribute nothing at all in a given year if you so choose (although your contributions must be "substantial and recurring" for your plan to remain qualified).  The plan must contain a formula for determining how your contributions are allocated among plan participants. A separate account is established for each participant that holds your contributions and any investment gains or losses. Generally, each employee with a year of service is eligible to participate (although you can require two years of service if your contributions are immediately vested).

A New Comparability Plan is a profit sharing plan in which employees are divided into groups with each group receiving a contribution that is a different percentage of compensation. The simplest form of grouping employees is to have the owners in one group and all other employees in another group.  Some employers have several groups such as owners, managers, professional staff, clerical staff, etc.  New Comparability Plans can be structured with a 401(k) plan or with a Safe Harbor 401(k) plan making them even more beneficial.

401(k) plan

The 401(k) plan (technically, a qualified profit-sharing plan with a cash or deferred feature) has become a hugely popular retirement savings vehicle for small businesses. According to the Department of Labor, an estimated 60 million American workers are enrolled in 401(k) plans with total assets of about 3 trillion dollars. With a 401(k) plan, employees can make pretax and/or Roth contributions in 2011 of up to $17,000 of pay ($22,500 if age 50 or older). These deferrals go into a separate account for each employee and aren't taxed until distributed. Generally, each employee with a year of service must be allowed to contribute to the plan.

You can also make employer contributions to your 401(k) plan--either matching contributions or discretionary profit-sharing contributions. Combined employer and employee contributions for any employee in 2012 can't exceed the lesser of $50,000 (plus catch-up contributions of up to $5,500 if your employee is age 50 or older) or 100% of the employee's compensation. In general, each employee with a year of service is eligible to receive employer contributions, but you can require two years of service if your contributions are immediately vested.

401(k) plans are required to perform somewhat complicated testing each year to make sure benefits aren't disproportionately weighted toward higher paid employees. However, you don't have to perform discrimination testing if you adopt a "safe harbor"  401(k) plan. With a safe harbor 401(k) plan, you generally have to either match your employees' contributions (100% of employee deferrals up to 3% of compensation, and 50% of deferrals between 3 and 5% of compensation), or make a fixed contribution of 3% of compensation for all eligible employees, regardless of whether they contribute to the plan. Your contributions must be fully vested.

Another way to avoid discrimination testing is by adopting a SIMPLE 401(k) plan. These plans are similar to SIMPLE IRAs, but can also allow loans and Roth contributions. Because they're still qualified plans (and therefore more complicated than SIMPLE IRAs), and allow less deferrals than traditional 401(k)s, SIMPLE 401(k)s haven't become a popular option. 

Recent tax laws now allow a one-person 401(k) plan. In the past, if the business was taking the maximum allowable deduction of 15%, no further contributions could be made. Any 401(k) elective deferral was counted toward the maximum deduction of the business so the owner could make no 401(k) deferral.    That has now changed since the deferral on behalf of the participant no longer counts against the maximum business deduction. In addition, the maximum business deduction was increased to 25% of participant’s salaries for a profit sharing plan. This combination of increased business deferral and a new allowable personal 401(k) deferral creates the scenario below for a one-person corporation.

Defined benefit plan

A defined benefit plan is a qualified retirement plan that guarantees your employees a specified level of benefits at retirement (for example, an annual benefit equal to 30% of final average pay). As the name suggests, it's the retirement benefit that's defined, not the level of contributions to the plan. In 2012, a defined benefit plan can provide an annual benefit of up to $200,000 (or 100% of pay if less). The services of an actuary are generally needed to determine the annual contributions that you must make to the plan to fund the promised benefit. Your contributions may vary from year to year, depending on the performance of plan investments and other factors.

In general, defined benefit plans are too costly and too complex for most small businesses. However, because they can provide the largest benefit of any retirement plan, and therefore allow the largest deductible employer contribution, defined benefit plans can be attractive to businesses that have a small group of highly compensated owners who are seeking to contribute as much money as possible on a tax-deferred basis.

As an employer, you have an important role to play in helping America's workers save. Now is the time to look into retirement plan programs for you and your employees.  Please call to arrange a no obligation “free look” at a professional plan design expressly for your business.

412(e)(3) Defined Benefit Plans412(e)(3) Defined Benefit Plans

Are you aware of 412(e)(3) Defined Benefit plans? These plans allow for the largest possible deductions to a small business retirement plan. These plans are particularly suited for independent contractors who have few or no employees. They are designed to maximize the deduction for the older small business owner to enable him to accumulate funds for his retirement in a very short period of time. Generally, it will be a firm with 5 or less employees where the owner is at least age 50 and earns a very high, consistent income.

Money Purchase Pension Plan

 
Corporations, Sub-Chapter S, Self-Employed, Sole Proprietorships, Partnerships, LLCs and Non-Profits can establish money purchase pension plans. These plans must provide “definitely determinable benefits”.  The plan contains a contribution formula (such as a set percentage of compensation), which is chosen when the plan is adopted, and employers must meet minimum funding requirements – contribution is mandatory (not discretionary). Plans must be established by fiscal year-end (December 31 for calendar year plan).

Permanent Life Insurance Tax Free Retirement Solution

—  Employer can choose who participates and reward key employees( in a tax-deductible way for business owner) and high paid executives may participate

—  The key employee owns the life insurance on their life and the business pays the premium directly or indirectly through a salary bonus.  The bonus is deductible by the business as an ordinary and necessary business expense ( Section 162 of the tax code)

—  Employee or business owner  have access to their cash build up in the policy through loans, to make major purchases at any time during life without tax consequences or penalties

—  Provides benefits for retirement, disability(funded by the policy)  and income tax free death benefit

—  Does not have a 70 ½ year old rule like a 401K/IRA which mandates distributions begin

Again, we will provide a FREE feasibility study to see if a plan fits your situation.  All that is needed from you is a census of employees of the firm.