Small Business Retirement Plans:

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1 Small Business Retirement Plans: Denise R. Bump Financial Advisor Bump & Associates A private wealth advisory practice of Ameriprise Financial Services, Inc. from SIMPLE to Sophisticated. 29 July 2014 Brokerage, investments and financial advisory services are made available through Ameriprise Financial Services, Inc. Member FINRA and SIPC Ameriprise Financial, Inc. All rights reserved.

2 Statistics about small businesses A MAJOR SEGMENT OF THE ECONOMY 99.9% of all U.S. businesses employ 500 or fewer employees 1 > 50% of all U.S. private-sector employees are employed by small business 1 28% of small businesses with 100 or fewer employees sponsor a business retirement plan 2 1 U.S. Small Business Administration, Office of Advocacy estimates from Frequently Asked Questions updated January 2011 ( 2 Small business Retirement Plan Availability and Worker Participation, by Kathryn Kobe. Economic Consulting Services, LLC for Small Business Administration Office of Advocacy

3 Plan sponsorship BENEFITS BUSINESS Tax-deductible contributions Opportunity to recruit and retain top talent Increased savings for owner s retirement EMPLOYEES Key element of the three-legged stool Deferral opportunities = simplified funding Match contributions = valuable savings incentive Tax-deferred growth Improved employee morale

4 Today s topics IRA-BASED PLANS SEP IRA PLANS SIMPLE IRA PLANS 401(k) & PROFIT SHARING PLANS DEFINED BENEFIT PLANS QUALIFIED RETIREMENT PLANS

5 IRA-based plans

6 An IRA-based plan WHAT IS IT? SEP SIMPLIFIED EMPLOYEE PENSION SIMPLE SAVINGS INCENTIVE MATCH PLAN FOR EMPLOYEES Typically easier and more cost-effective than qualified plans Employer-sponsored retirement plan funded through employee-owned IRAs

7 IRA-based plans ADVANTAGES Lower administrative costs No special government reporting Portability & accessibility SEP/SIMPLE IRA No fiduciary liability for investments No ERISA bonding requirements Generally, longer eligibility requirements (SEPs)

8 SEP IRA FEATURES Employer contributions - up to 25% of compensation $51,000 maximum 2013 contribution No government reporting Establish by tax-filing date - including extensions No loans or vesting

9 SEP IRA COVERAGE REQUIREMENTS Eligibility restrictions Age requirement Age 21 Employment requirement 3 of past 5 years Compensation requirement $550 for 2013 Note May also exclude certain collectively-bargained employees Business owner is also subject to eligibility restrictions

10 SEP IRA plan THE STRUCTURE EMPLOYER S SEP PLAN $$ EMPLOYER S SEP IRA $$ EMPLOYEE S SEP IRA $$ EMPLOYEE S SEP IRA Employer-level SEP Plan document outlines participation criteria, etc. Each participant must establish his/her own traditional (SEP) IRA to receive SEP contributions

11 SIMPLE IRA FEATURES 2013 EMPLOYEE DEFERRALS UP TO $12,000 EMPLOYER FUNDING ALTERNATIVES; MATCH OR NON-ELECTIVE LOW ADMINISTRATION COSTS CATCH-UP DEFERRALS OF $2,500 FOR THOSE 50 OR OVER LIMITED FIDUCIARY LIABILITY DEADLINE TO ESTABLISH - OCTOBER 1

12 SIMPLE IRA EMPLOYER FUNDING ALTERNATIVES METHOD 1 100% match contribution up to 3% of compensation (can be lowered to 1% in two out of five years) METHOD 2 2% non-elective contribution to all eligible employees

13 SIMPLE IRA PLAN STRUCTURE Employer s SIMPLE IRA $$ EMPLOYER S SIMPLE IRA EMPLOYER S MATCH OR NON-ELECTIVE CONTRIBUTION $$ EMPLOYEE S SIMPLE IRA EMPLOYEES SALARY DEFERRALS $$ EMPLOYEE S SIMPLE IRA Employer-level SIMPLE Plan document outlines participation criteria, etc. Each participant must establish his/her own SIMPLE IRA to receive contributions

14 SIMPLE/SEP COMPARISON SEP Simple Contributor & Annual Income Deferral Employer Contribution Deferral Employer Contribution Employer (Andrew) $50,000 $0 $10,000 $8500 $1,500 Employee #1 $20,000 $0 $4,000 $600 $600 Employee #2 $20,000 $0 $4,000 $600 $600 Employee #3 $20,000 $0 $4,000 $600 $600 Total employer funding cost $22,000 $11,800 Total employee funding cost $0 $1,800

15 Qualified plans

16 A qualified plan WHAT IS IT? DEFINED CONTRIBUTION DEFINED BENEFIT Qualified under section IRC sec. 401(a) Typically more costly than IRA-based plans More features & larger deductions than IRA-based plans

17 401(k) plans MOST POPULAR DEFINED CONTRIBUTION PLAN 51 MILLION ACTIVE PARTICIPANTS* $3.5 TRILLION IN TOTAL ASSETS** APPROXIMATELY 70% OF TOTAL DEFINED CONTRIBUTION MARKET*** SPONSORED BY EMPLOYERS OF ALL SIZES INCREASINGLY AFFORDABLE FOR SMALL BUSINESS THANKS TO ADVANCES IN TECHNOLOGY *The Success of the U.S. Retirement System, 2012,Investment Company Institute (ICI) ( **News & Media 2012, ICI ( ***The U.S. Retirement Market Third Quarter 2012, ICI

18 401(k) plans ADVANTAGES TWO FUNDING COMPONENTS 2013 SALARY-DEFERRAL UP TO $17,500 0%-25% DISCRETIONARY PROFIT- SHARING OF ELIGIBLE COMPENSATION 2013 AGGREGATE LIMIT - 100% UP TO $51,000 $5,500 SALARY DEFERRAL CATCH-UP FOR THOSE 50 OR OLDER LOANS VESTING ROTH 401(K) DEFERRAL OPTION

19 401(k) plans DISCRIMINATION TESTING EXAMPLES Average deferral percentage (ADP) test Actual contribution percentage (ACP) text 410(b) minimum coverage test Top-heavy test Restricts coverage & contributions provided for owners and highly-paid employees, based on coverage & contributions provided for rank-and-file employees

20 401(k) plans DISCRIMINATION TESTING AVERAGE DEFERRAL PERCENTAGE TEST EXAMPLE EMPLOYEE COMPENSATION PERCENTAGE OF AVERAGE DEFERRAL RATE Non-highly compensated Highly compensated - must not exceed

21 401(k) plans SAFE HARBOR DESIGN ALTERNATIVES PLAN DESIGN OPTIONS ENABLE EMPLOYERS TO AVOID ONE OR MORE DISCRIMINATION TESTS TYPICALLY REQUIRES A MINIMUM EMPLOYER FUNDING LEVEL MAY INCREASE FUNDING COSTS, BUT WILL TYPICALLY LOWER ADMINISTRATIVE COSTS OF PLAN OFTEN ENABLES HIGHER DEFERRALS FOR OWNERS AND HIGHLY- PAID EMPLOYEES

22 401(k) Plans PROFIT SHARING ALLOCATION FORMULAS Pro rata ALL PARTICIPANTS GET SAME PERCENTAGE Age-weighted OLDER PARTICIPANTS GET LARGER PERCENTAGE Integrated HIGHER-PAID PARTICIPANTS GET LARGER PERCENTAGE New comparability ADVANCED DESIGN OPTION

23 DC-Plan allocation formula POTENTIAL IMPACT 40% 60% Sample Company Employees Compensation Owner #1 $255,000 Pro rata Owners $102, Non-owners $ 68,000 Total $170,000 40% 60% Owner #2 $255,000 Employee #1 $60,000 Integrated Employee #2 $50,000 Employee #3 $50,000 Employee #4 $50,000 Owners $102, Non-owners $56, Total $158, % 64% Employee #5 $40,000 Employee #6 $40,000 Employee #7 $30,000 Employee #8 $20,000 New comp max Owners $102, Non-owners $17, Total $119, % 86% Source: Expert Plan Retirement Plan Services These examples are hypothetical and do not represent actual companies or employees. 25

24 Individual 401(k) 401(k) USED BY BUSINESS OWNERS WITH NO EMPLOYEES ADVANTAGES OVER SEP/SIMPLE PLANS higher contribution limits plan loan feature Roth deferral option COST-SAVINGS OVER TRADITIONAL, MULTI-PARTICIPANT 401(k) PLANS exempt from discrimination testing exempt from IRS form 5500 filing (until assets exceed $250,000)

25 Individual 401(k) EXAMPLE CONTRIBUTIONS SEP SIMPLE INDIVIDUAL(k) Salary Deferral N/A $12,000 $17,500 Employer $25,000 $3,000 $25,000 Total $25,000 $15,000 $42,500 ASSUMPTIONS OBJECTIVE: FLEXIBILITY, LARGE DEDUCTION OWNER-ONLY BUSINESS $100,000 OF W-2 INCOME CORPORATE ENTITY This hypothetical example is provided for illustrative purposes only.

26 Defined benefit plans ATTRIBUTES Mandatory funding based on plan benefit formula, actuarial assumptions Typically more costly to administer than 401(k) plans and IRA-based plans Declining sponsorship in recent years but still appealing to some small business owners due to potential for significantly higher funding/deductions CASH BALANCE DEFINED BENEFIT PLAN Special type of defined benefit plan with defined contribution plan characteristics Formally recognized by congress in Pension Protection Act of 2006 (PPA) Popular with small business owners looking for maximum funding Often paired with a defined contribution plan

27 Cash balance plan paired with new compensation plan EXAMPLE Name Owner/ HCE? Age Compensation Profit sharing -pro rata Combination new comp/ cash balance Scenario #1 Scenario #2 Allocation % of Comp. Allocation % of Comp. Alice Y 50 $255,000 $51,000 20% $178, % Frank Y 60 $255,000 $51,000 20% $262, % Barbara N 35 $50,000 $10,000 20% $4, % Gertrude N 35 $40,000 $8,000 20% $3, % Jackie N 30 $35,000 $7,000 20% $3, % Marge N 25 $25,000 $7,000 20% $2, % Source: Allocation projections generated by Expert Plan Retirement Plan Services These examples are hypothetical and do not represent actual companies or employees. 29

28 Thank you. Ameriprise Financial and its representatives do not provide tax or legal advice. Consult your tax advisor or attorney regarding specific tax issues. Brokerage, investments and financial advisory services are made available through Ameriprise Financial Services, Inc. Member FINRA and SIPC Ameriprise Financial, Inc. All rights reserved.

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