Not Too Late for a 401(k)!
For years, reappearance of a pumpkin-spiced latte (extra foam, please) at a local coffee shop has been one of the sure signs of fall. Like clockwork, it seems that just around this time, the weather cools, the leaves change colors, and business profits begin coming into focus in the context of the year-end tax planning. Evaluation of retirement plan options may uncover a variety of compelling opportunities around this time of year.
The Optimum Plan Design
The optimum plan design for any business owner balances three basic elements: the savings objectives (in large plans, participation and deferral rates), business cash flow, and attitudes toward employee benefits and retirement security. When those three elements are brought into harmony, the ideal plan design has been found.
The first step to identifying the optimum plan design is to gather basic employee census data and understand the funding objectives and cash flow. Your Retirement Services subject matter experts are available as a consulting resource to walk you and your prospect or client through the discovery process and identify the ideal plan design. We built a simple fact-finder just for this purpose.
Year-end Opportunities for Owner-only Businesses
Businesses without rank-and-file employees (one-person organizations or businesses that employ only owners and their immediate family members) will typically have a simplified set of plan design considerations since there is no need to factor in implications of employee participation in the plan.
In virtually any income scenario, a Solo(k) can receive higher contributions than a SIMPLE or SEP IRA. For example, business owner under age 50 with W-2 of $100,000 can contribute a total of $14,500 to a SIMPLE IRA, $25,000 to a SEP IRA, and $42,500 to a Solo(k) plan.
Additional benefits of a Solo(k) are tax diversification in accumulation and distribution phases through a Roth 401(k) deferral feature which provides a tax-free stream of income in retirement, increased accessibility to plan assets via plan loan and in-service distributions features, and catch-up contributions up to $5,500 for those 50 or older. First Allied developed a compelling and cost-effective Solo(k) solution which is easy to implement and maintain. Learn more about it here.
For those who seek a higher deduction, a defined benefit plan can be added to increase contributions beyond the 401(k) plan limit.
Year-end Opportunities for Businesses with Employees
Traditional 401(k) plans for businesses with employees must be established by 12/1. These plans are required to perform testing in which the average deferral percentage among non-highly compensated employees (NHCEs) is compared to the average deferral percentage of highly compensated employees (HCEs). Too great a disparity requires a contribution to NHCEs or reversal of HCE contributions to bring the plan in balance.
To overcome this testing issue, retirement plans for businesses with rank-and-file employees often utilize Safe Harbor provisions. Safe Harbor 401(k) plans require the employer to make either a 3% contribution for all eligible employees or a match for those who choose to defer; Safe Harbor 401(k) automatically is deemed to pass their ADP and ACP tests.
These plans have some additional benefits when compared to SEPs or SIMPLEs. They offer tax diversification by way of the Roth 401(k) deferral feature, better accessibility to account accumulation in pre-retirement, and creditor protection under Title I of ERISA. If the employer elects to make a Profit Sharing contribution over and above the Safe Harbor minimum, a vesting schedule can be attached to those funds, enhancing the plan’s effect on employee retention.
Missed the Safe Harbor 401(k) Implementation Deadline? There is a way!
Safe Harbor plans require employees be offered a 60-day window to enroll. In addition, one needs a full month’s payroll after the enrollment window but before year end to defer salary, making October 1 the last day for calendar-year businesses to establish a Safe Harbor 401(k).
If a business owner intends to have a Safe Harbor plan but missed the October 1 implementation deadline, they can still implement a traditional 401(k) without Safe Harbor provisions before December 1. Rules applicable to first-year plans allow the HCEs to defer 5% of salary without concern over ADP or ACP test failure. The plan must be established before 12/1 and implement Safe Harbor provisions on January 1 of the New Year to take advantage of this opportunity.
SEP & SIMPLE IRA Replacement
Most SEP IRAs have not yet received current year contributions. Owner-only businesses have until 12/31 to establish a replacement qualified plan. Businesses with eligible non-owner employees can establish a 401(k) plan relying on the 5% rule described above. If current year contributions have already been made, consult with Retirement Services to explore the various alternatives.
SIMPLE IRA plans preclude other plans from being offered during any year in which an employer sponsors a SIMPLE. At least 60-days notice must be given to employees when a SIMPLE plan is terminated. Therefore, SIMPLE IRA plan sponsors that intend to replace their plans should distribute written notice to employees informing them of their intent to replace the SIMPLE by November 2. A sample notice to participants is available from your Retirement Services SMEs. This time period presents a perfect opportunity to explore qualified plan alternatives.
Defined Benefit Plan or Cash Balance Plan Setup
Business owners with a desire to save beyond defined contribution plan limits may pair a defined benefit or a cash balance plan with a 401(k) plan. This combination plan strategy has become feasible thanks to the passing of the Pension Protection Act. Those who wish to adopt a defined benefit plan can do so right up until the last day of the year. As an added bonus, the funding amount in the first year may be adjusted up to March 15, therefore providing additional time for determining the desired contribution level. The key is to have a retirement plan document in place by December 31.
As always, for questions regarding retirement plan design opportunities, year-end deadlines, and plan enhancement or replacement process, please contact Retirement Services at (888) 926-0600 or via email to email@example.com .
- Simple IRA or Simply a 401(k)? (retirementnewsyoucanuse.wordpress.com)
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- Top Tax Write-offs for the Self-Employed (turbotax.intuit.com)
- What a Safe Harbor 401(k) and Monopoly Have in Common (retirementnewsyoucanuse.wordpress.com)
- Safe Harbor 401(k): Designed with an End in Mind (retirementnewsyoucanuse.wordpress.com)
- Cash Balance Plan Advantage (farsupdate.com)
- Boost Your Retirement Savings (turbotax.intuit.com)
- Self-Employed? You Need a Retirement Plan (money.usnews.com)