Small Business Retirement Plans:

Transcription

1 Small Business Retirement Plans: From SIMPLE to Sophisticated Pete Levy ChFC Financial Advisor

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 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

6 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)

7 SEP IRA FEATURES Employer contributions - up to 25% of compensation $50,000 maximum 2012 contribution No government reporting Establish by tax-filing date -including extensions No loans or vesting

8 SEP IRA COVERAGE REQUIREMENTS Eligibility restrictions Age requirement Age 21 Employment requirement 3 of past 5 years Compensation requirement $550 for 2012 Note May also exclude certain collectively-bargained employees Business owner is also subject to eligibility restrictions

9 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

10 SIMPLE IRA FEATURES 2011 & 2012 EMPLOYEE DEFERRALS UP TO $11,500 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

11 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

12 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

13 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

14 401(k) plans MOST POPULAR DEFINED CONTRIBUTION PLAN 49.8 MILLION ACTIVE PARTICIPANTS* $3.2 TRILLION IN TOTAL ASSETS** APPROXIMATELY 68% OF TOTAL DEFINED CONTRIBUTION MARKET** SPONSORED BY EMPLOYERS OF ALL SIZES INCREASINGLY AFFORDABLE FOR SMALL BUSINESS THANKS TO ADVANCES IN TECHNOLOGY

15 401(k) plans ADVANTAGES TWO FUNDING COMPONENTS 2012 SALARY-DEFERRAL UP TO $17,000 0%-25% DISCRETIONARY PROFIT-SHARING OF ELIGIBLE COMPENSATION 2012 AGGREGATE LIMIT - 100% UP TO $50,000 $5,500 SALARY DEFERRAL CATCH-UP FOR THOSE 50 OR OLDER LOANS VESTING ROTH 401(K) DEFERRAL OPTION

16 401(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 highlypaid employees, based on coverage & contributions provided for rank-and-file employees

17 401(k) plans DISCRIMINATION TESTING AVERAGE DEFERRAL PERCENTAGE TEST EXAMPLE EMPLOYEE COMPENSATION PERCENTAGE OF AVERAGE DEFERRAL RATE Non-highly compensated Highly compensated - must not exceed

18 401(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

19 401(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

20 DC-Plan Allocation Formula POTENTIAL IMPACT Sample Company Pro rata Employees Compensation Owner #1 $245,000 Owners $ 61, Non-owners $ 45, Total $106, % 58% Owner #2 $245,000 Employee #1 $60,000 Integrated Employee #2 $50,000 Employee #3 $50,000 Employee #4 $50,000 Owners $61, Non-owners $34, Total $95, % 64% Employee #5 $40,000 Employee #6 $40,000 Employee #7 $30,000 Employee #8 $20,000 New comp max Owners $61, Non-owners $15, Total $76, % 80%

21 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)

22 Individual 401(k) EXAMPLE CONTRIBUTIONS SEP SIMPLE INDIVIDUAL(k) Salary Deferral N/A $11,500 $17,000 Employer $25,000 $3,000 $25,000 Total $25,000 $14,500 $42,000 ASSUMPTIONS OBJECTIVE: FLEXIBILITY, LARGE DEDUCTION OWNER-ONLY BUSINESS $100,000 OF W-2 INCOME CORPORATE ENTITY

23 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

24 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 $245,000 $49,000 20% $178, % Frank Y 60 $245,000 $49,000 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, %

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