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Business Retirement Plan Guide

| September 25, 2018
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This is a guide to the retirement plan options available to businesses, business owners, and individuals.

There isn't any fluff. It's the characteristics or each plan, the numbers, and the rules.

The "table of contents" below will give you an idea of where each item is if you are looking for something in particular.

What retirement plan options do I have?

  • 401(k)
  • Solo 401(k)
  • Roth 401(k)
  • Simple 401(k)
  • Safe Harbor 401(k)
  • 403(b)
  • 457
  • SEP IRA
  • Simple IRA
  • Traditional IRA
  • Roth IRA
  • Defined Benefit Plan
  • Non-qualified deferred compensation
    • Supplemental executive retirement plan
    • Voluntary deferral plans
    • Wraparound 401(k)
    • Excess benefits plan
    • Deferred arrangement
    • Bonus plan

401(k)

  • Contributions
    • Employee maximum $18,000
    • Catch – up contribution of $6,000 for those 50 and older
    • Total contribution (employee and employer) is lesser of 100% of employee compensation OR $54,000
    • Contributions are tax-deductible to the employer
    • Growth within the account is tax-deferred
  • Withdrawals
    • Taxed upon withdrawal at ordinary income tax bracket
    • Withdrawals before 59 ½ assessed a 10% penalty unless exceptions apply
      • Medical expenses that add up to more than 10% of your adjusted gross income
      • If you lose your job and collect unemployment for 12 consecutive weeks, can use retirement savings to pay health insurance
      • College costs
      • First home purchase ($ 10,000-lifetime max)
      • Disability
      • Military – active duty for more than 179 days
      • Death distribution
      • At least 55 years of age and separate from the employer
      • IRS tax levy
    • Loans are allowed (can vary by plan)
      • 50% of vested balance up to $50,000
      • Payback within 5 years
      • Payback within 2 months if you leave the employer
    • Distributions are required when you hit the age of 70 ½
      • Calculated annually based on our life expectancy
    • Rules
      • Vesting schedule – employer contributions may not be available in totality right away
      • Costs range from 2% to 3% per year (percent of assets under management)
      • Employees are eligible if they are at least 21 years of age and have 1 year of service
        • Eligibility requirements can vary by plan
      • Set up
        • Adopt a written plan
        • Arrange a trust to retain the plan assets
        • Set up a record keeping system
        • Provide information to the participants
        • File Form 5500 for large plans (more than 100 participants)
        • File Form 5500-SF for small plans (100 or fewer participants)

Solo 401(k)

  • Same rules as 401(k) except Solo 401(k) is only available to a self-employed individual OR if your only employee is your spouse
  • File Form 5500-EZ

Roth 401(k)

  • Most of the rules are the same
  • Things that are different
    • No Distributions required at 70 ½
    • Contributions are post-tax
    • Tax-free withdrawals after 59 ½

Simple 401(k)

  • Contributions
    • Max contribution of $12,500 per employee
    • Catch-up contribution of $3,000 for those 50 or older
    • The employer contribution is either…
      • 100% match up to 3% of employees salary OR
      • 2% non-elective contribution (doesn’t matter if an employee contributes or not)
    • Withdrawals
      • Withdrawal rules are the same as a regular 401(k)
    • Other rules
      • Only eligible to businesses with 100 or fewer employees
      • The plan must be established between January 1 and October 1. Unless the business is formed after October 1.
      • Employees who are 21 years or older and have completed one year of service are eligible.
      • Contributions are 100% vested right away
      • File Form 5500-SF

Safe Harbor 401(k)

  • Most rules are the same as the standard 401(k)
  • Key characteristics
    • Automatically pass nondiscrimination tests
      • ADP test – takes into account pre-tax deferrals and after-tax Roth deferrals. To past test, the Actual deferral percentage (ADP) of highly-compensated employees (HCE) must not be more than 2% higher than ADP of Non-HCE. Additionally, the combined contributions of HCE must not be more than 2 times more than the combined contributions of Non-HCE.
      • ACP test – Same test, but also takes into account matching contributions from employers and catch-up contributions
      • Top-heavy test – Group together the total account value of your key employees and compare that to the total account value of the plan. If your key employees make up more than 60% of the plan value, then you are top heavy.
    • The employer must make the same percentage of salary contribution to every employee
    • Employer contribution options
      • Employer matches 100% of the first 3% and 50% of the next 2%
      • Employer matches 100% of the first 4%
      • Employer contributes 3% to all eligible employees (whether the employee contributes or not)
    • Employee contribution is lesser of…
      • 100% of employee income OR
      • $55,000 - $61,000 (high number includes catch-up contribution)

403(b)

  • Contributions
    • $18,500
    • $24,500 if 50 or older
    • Total contribution max…
      • $55,000 OR
      • 100% of employees most recent yearly salary
    • Lifetime catch-up contribution for those who worked for a qualified organization for at least 15 years - $21,000 maximum
    • Growth is tax-deferred
  • Withdrawals
    • 10% penalty for distributions before 59 1/2, unless an exception applies
      • Same exceptions as those for a 401(k)
    • Required distributions at 70 1/2
  • Other Rules
    • Designed for public schools and other tax-exempt organizations
    • Annual costs range from .5% to 1.5%
    • Vesting schedule varies by plan
    • File Form 5500

457

  • Contributions
    • $18,000 max contribution between employee and employer
    • $6,000 catch-up for those 50 or older
    • Special catch-up contribution for employee 3 years from retirement
      • The lesser of…
      • $37,000 OR
      • The basic annual limit plus the amount of the basic annual limit not used in previous years
    • Growth is tax deferred
  • Withdrawals
    • 10% early withdrawal penalty does not apply
  • Other Rules
    • Offered to local and state government employees
    • Vesting schedule varies by plan

SEP IRA

  • Contributions
    • The maximum contribution is lesser of 25% of employee compensation OR $54,000
    • All contributions made by the employer
    • Don’t have to contribute every year
    • Contributions are tax deductible for the business
    • Must contribute the same percentage of salary for employees as you contribute for yourself
    • Self-employed contributions
      • If you don’t know the salary you pay yourself, your contribution max is 18.6% of net profits OR $54,000, whichever is less
    • There are no catch-up contributions
  • Withdrawals
    • Taxed at ordinary income tax bracket
    • 10% early withdrawal penalty applies
      • Same exceptions apply as with previous plans
    • Distributions required beginning at age 70 ½
  • Other Rules
    • Employees own and control the account
    • Employees are 100% vested right away
    • Growth is tax-deferred
    • Eligibility requirements
      • 21 years of age or older
      • Worked for 3 of the last 5 years
      • Earned at least $600
    • Costs to set up and administer are low
    • File Form 5305-SEP

Simple IRA

  • Contributions
    • Max contribution is $12,500
    • $3,000 catch-up contribution if 50 or older
    • The employer contribution is either
      • 100% match, up to 3% OR
      • 2% non-elective contribution to all eligible employees
    • Contributions are tax-deductible for the business
    • Employer contributions are 100% vested right away
  • Withdrawals
    • 10% penalty if you withdraw money before 59 ½
      • Same exceptions as previous plans
    • 25% penalty if you withdraw money within 2 years of your first contribution
  • Other Rules
    • For companies with 100 or fewer employees
    • Costs to set up and maintain are low
    • Employees choose investments
    • No loans allowed
    • If an employee has received at least $5,000 in compensation during any 2 previous years and is expected to receive at least $5,000 in compensation this year may participate
    • Employees are 100% vested right away
    • Must set up before October 1st, unless you form business after October 1st
  • Forms needed
    • 5304-Simple if employees choose the financial institution
    • 5305-Simple if the employer chooses the financial institution
    • Simple IRA Adoption Agreement

Traditional IRA

  • Contributions
    • Max contribution - $5,500
    • Catch-up of $1,000 if 50 or older
    • Contributions are tax-deductible unless…
      • You make $73,000 or more (single)
      • You make $199,000 or more and DO NOT participate in an employer plan
      • You make $121,000 or more and DO participate in an employer plan
    • Withdrawals
      • 10% early withdrawal penalty before 59 ½
        • Same exceptions as previous plans
      • Required distributions beginning at 70 1/2
      • Taxed at ordinary income tax bracket
    • Other Rules
      • Eligibility Requirements
        • Had earned income (wages, salary, self-employment income)
        • Are under the age of 70 1/2

Roth IRA

  • Contributions
    • Max contribution - $5,500
    • Catch-up of $1,000 if 50 or older
    • Not tax deductible
    • No eligible to contribute if…
      • You make $135,000 (single)
      • You make $199,000 (married filing jointly)
    • Backdoor method
      • Contribute to Traditional IRA, then roll assets into Roth IRA
    • Withdrawals
      • Tax-free
      • 10% early withdrawal penalty before 59 ½
        • Same exceptions as previous plans
      • 5-year rule – you are taxed on earnings if you withdraw within 5 years of your initial contribution
      • No required distributions

Defined Benefit Plan

  • Contributions
    • The employer is solely responsible for contributions
    • The contribution limit is lesser of $220,000 OR
    • 100% of participant’s average compensation for the highest 3 consecutive calendar years
    • The employer contribution is placed in a tax-deferred account
    • An employee may be eligible to contribute, but this varies by plan
    • Contribution by the employer is usually a percentage of the employee’s salary
    • Contributions are tax-deductible to the business (administrative fees are also deductible)
  • Withdrawals
    • The benefit can be fixed OR calculated based on years of service, age, and average salary
    • Have two payment options: single life annuity OR joint and survivor annuity
    • Single life annuity payout is higher than joint and survivor annuity
  • Other Rules
    • Assets cannot be touched by creditors
    • Fees for the plan could be as high as $2,000 per plan per year and $50 per employee per year
    • Eligibility varies by plan
    • Vesting schedule varies by plan
    • File Form 5500

Non-Qualified Deferred Compensation Plan

  • Contributions
    • No contribution limit, unless specified by employer/administrator
    • Deferred compensation is held with a financial institution
    • The employer is in control of assets
  • Withdrawals
    • Need to be taken on a specific date
    • Can’t withdraw before a specified date (unless specified in plan documents)
  • Other Rules
    • There needs to be a formal document that specifies when the deferral will occur, the amount to be paid out, and the possible triggering events.
    • Triggering events: a fixed date, separation from service, change of ownership of the company, disability, or death
    • Able to offer to executives or key employees ONLY because there are no ERISA rules to follow
    • You can “lock in” key employees – if they leave, they could forfeit their benefits
    • Highly compensated employees could max out a 401(k) and defer compensation to this plan as well
    • Investment options are similar to those in a 401(k)
    • Assets are “up for grabs” from creditors if the company gets into financial troubles

Types of NQDC Plans

  • Supplemental Executive Retirement Plan
    • Easy to implement and require no IRS approval
    • The company can choose which executives participate
    • Most companies use cash value life insurance to fund the policy
    • The company controls the plan and policy
    • A company can record “book income” on the cash value growth
    • Cash value accumulates tax-deferred
    • When benefits are paid to an employee, the company gets a tax deduction
    • If the executive dies, life insurance policy can be paid to the beneficiaries
    • Cash value build up is vulnerable to creditors
    • Deferred benefits are taxed to the executive upon payout
    • No contribution limits
  • Voluntary Deferral Plan
    • A company can choose who to offer benefits to
    • No contribution limits
    • Employee defers a portion of their salary for retirement
    • Contributions are tax-deferred until retirement
  • Wrap around 401(k)
    • Similar plan features as standard 401(k), except contribution limits
    • Used in tandem to existing 401(k)
    • A company can select who to offer a plan to
    • Funded with employee deferrals
  • Excess benefit plan
    • Can be funded by the employer or the employee
    • If funded by the employer, assets could be vulnerable to creditors
      • Set up and fund through rabbi trust to keep safe
    • A company receives tax-deduction when they contribute on employee’s behalf
  • Bonus Plan
    • Company picks which employees participate
    • Company picks how much the bonus is
    • Creates incentives for employees to earn bonuses

Conclusion

There are so many plan options available to businesses, and each plan has its own unique characteristics. With all that available, setting up and administering a plan can be quite easy. Sometimes it takes an expert to figure out which plan is best for you and your business, but often times it only takes asking the right questions.

  1. How many employees do I have/will I have?
  2. What contribution limits do I want?
  3. How much do I want to pay?

Those are the most vital questions you need to ask. Often times, the answers to those questions will dictate what plan is right for you. There are instances, however, when you have a more complicated business structure and you need a plan that fits that structure.

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