Retirement Solutions for Your Business

Transcription

1 Retirement Solutions for Your Business

2 Our Service Warranty We promise to provide quality service in a competent, capable and effective manner. If we don t, we ll either fix the problem or we ll waive the fee for that service. 1 We also indemnify the appropriate fiduciary with respect to their liability, losses and reasonable expenses directly incurred by them if we fail to perform a particular service in the agreed manner. 1,2 Not FDIC or NCUA insured May lose value Not a deposit No bank or credit union guarantee Not insured by any Federal government agency 1 This brochure is for informational purposes only and does not affect the terms and provisions defined in any term or provision of the Service Warranty. For comprehensive warranty details on the levels of coverage we offer, see the Service Warranty document. 2 For purposes of nonqualified plans and plans that are not subject to ERISA, Principal Life indemnifies the Plan Representative who signs the Service Agreement.

3 Retirement solutions for your business Most owners of growing businesses want to provide a retirement benefit for themselves and their employees. No matter what your retirement goals are, the Principal Financial Group can help. The Principal offers products and services for each stage of your company s development. We provide: Retirement plan services: bundled and third party administrator (TPA) A diverse range of investment options Resources and service options to help you maintain your retirement plan We work with thousands of small business clients. They each build, sell or service something different, but they all have one thing in common: they want a retirement plan tailored to their needs at a reasonable cost. The following pages illustrate many retirement plan design possibilities. Why consider a retirement plan? Would you like to: Reduce your business taxes? Build vital retirement savings for yourself? Provide an attractive retirement plan to recruit, reward and retain valuable employees? Qualified retirement plans can help provide these advantages and are a great way to save for retirement with benefits like pre-tax savings and potential tax-deferred growth. Your service team can help you: Sort through the various products Find possible solutions for your business Walk you and your employees through the steps to establish your retirement plan 1

4 Plans at a glance 401(k) Plan Safe Harbor 401(k) Plan Target or Typical Plan Sponsor All businesses, except government agencies. All businesses, except government agencies. Best Features Provides pre-tax retirement saving and flexibility. Provides pre-tax retirement saving and flexibility. Funded By Employee and employer. Employee and employer. Eligibility Requirements Usually employees age 21 or older with one year of service and 1,000 hours. Usually employees age 21 or older with 1 year of service and 1,000 hours. Maximum Annual Individual Contribution Contributions are the lesser of the plan or Internal Revenue Service (IRS) limit $18,000 1 and up to 100% of your annual eligible compensation. Contributions are the lesser of the plan or IRS limit $18,000 1 and up to 100% of your annual eligible compensation. Maximum Annual Employer Contribution 25% of eligible employee compensation up to $53, Choice of 2 required contributions: 1. Match 100% of first 3% of compensation 2 plus 50% of next 2% of compensation, 2 OR 2. Contribution of 3% of compensation 2 to all eligible employees. 3 Additional employer contributions may be allowed; however, when combined with required contribution, total contribution cannot exceed 25% of eligible employee compensation up to $53,000. Vesting Schedule Vesting schedule available. 100% immediate vesting on required match or nonelective contribution. Additional employer contributions may be subject to a vesting schedule. Plan Compliance Testing and Government Reporting ADP 4 Yes Top Heavy 5 Yes 415 Testing 6 Yes Government Reporting 7 Yes ADP 4 No Top Heavy 5 No Testing 6 Yes Government Reporting 7 Yes Loans Available Yes. Yes. When to Establish Any time. At least 3 months prior to plan year-end. 1 Individuals age 50 and over are allowed to make catch-up contributions. 401(k) and Safe Harbor 401(k) allow a $6,000 catch-up contribution. The SIMPLE-IRA catch-up contribution is $3,000, and the Roth IRA and Traditional IRA catch-up contributions are $1, As indexed by the IRS for the 2016 calendar year. For purposes of maximum contributions, compensation is limited to $265,000 per participant per year. 3 Safe Harbor 401(k) plans allowing additional contributions are subject to top-heavy testing. 4 Federal laws and regulations require that qualified plans don t discriminate in favor of the highly compensated employees in your organization. These employees are a group of owners and highly paid employees. The IRS developed the Actual Deferral Percentage/Actual Contribution Percentage (ADP/ACP) test(s) to prove discrimination is not occurring in your plan. Your plan must meet the test(s) each plan year. 2

5 Plans at a glance SIMPLE-IRA Profit Sharing Plan SEP-IRA Target or Typical Plan Sponsor All businesses with fewer than 100 employees, including the self-employed. All businesses. All businesses. Most appealing to those with 10 or fewer employees. Best Features Provides pre-tax retirement saving and easy administration. Allows flexible contributions. Easy administration and flexibility. Funded By Employee and employer. Employer. Employer. Eligibility Requirements Employees earning $5,000 in 2 prior years. Usually employees age 21 or older with 1 year of service and 1,000 hours. Usually employees age 21 or older with any service in 3 out of 5 years. Maximum Annual Individual Contribution 100% of compensation up to $12,500. 1, 2 Not applicable. Not applicable. Maximum Annual Employer Contribution Choice of 2 required contributions: 1. Match 100% up to 3% of compensation, OR 2. Contribution of 2% of compensation 2 to all eligible employees. The match can be reduced in 2 out of 5 years. No additional employer contributions are allowed. 25% of eligible employee compensation 2 up to $53,000. Contribution amount is discretionary each year. Profit sharing contributions can be allocated in the following ways: Pay-to-pay Integrated Age weighted Comparability 25% of eligible employee compensation 2 up to $53,000. Contribution amount is discretionary each year. Vesting Schedule 100% immediate vesting. Vesting schedule available. 100% immediate vesting. Plan Compliance Testing and Government Reporting ADP 4 - No Top Heavy 5 No 415 Testing 6 No Government Reporting 7 No ADP 4 No Top Heavy 5 Yes 415 Testing 6 Yes Government Reporting 7 Yes ADP 4 No Top Heavy 5 Yes 415 Testing 6 No Government Reporting 7 No Loans Available No. Yes. No. When to Establish Jan. 1 - Oct. 1. Prior to fiscal year-end. Any time prior to tax filing, including extensions. 5 Part of maintaining a qualified retirement plan includes determining its top-heavy status each year. To help you with your plan administration and according to Internal Revenue Code 416, we provide you with account values or perform a top-heavy test for your approval each year. A plan is top heavy when key employees hold more than 60 percent of its retirement funds in the accounts the plan holds for their benefit. Results of the top-heavy test may affect vesting requirements for a plan year. In addition, a minimum contribution of up to three percent of compensation may be due for the year(s) in which a plan is top heavy. 6 Internal Revenue Code Section 415 specifies the amount of contribution that may be allocated to an employee for a limitation year. If 415 limits are exceeded, the qualified status of your plan may be jeopardized. We perform the 415 limits test each year to verify that your participants stay within these guidelines. 7 The Principal helps produce the Form 5500, audit package and applicable schedules for our clients based on information provided by the clients. 3

6 401(k) plan The 401(k) plan is a very popular retirement plan for large and medium-sized companies. But it may also be appropriate for small businesses because of the following features: Flexible plan design Employees can make pre-tax salary deferrals of up to $18,000 1 Your business may make optional profit sharing and matching contributions 2 Individuals age 50 and older are allowed to make a $6,000 1 catch-up contribution if meeting the lesser of the plan or IRS limit Company contributions are tax deductible; pre-tax contributions and earnings are tax deferred However, a high level of participation is usually necessary in order for owners or key employees to defer the maximum contributions permitted by the IRS. Company matching contributions and/or profit sharing contributions are optional. Case study 20 full-time eligible employees $1,045,000 in payroll 1.5% match (25% up to 6%) Employee group deferring 6% of pay Consider this... In this example, a 401(k) plan can help the owners save a total of $31,500 a year and contribute to their employees retirement accounts for a net cost of only $10,815 after annual tax savings. 1 As indexed by the IRS for the 2016 calendar year. 2 Salary deferrals and optional profit sharing and matching contributions cannot exceed the lesser of 100 percent of pay or $53,000 per participant. Total employer contribution to plan cannot exceed 25 percent of total eligible compensation (2016 calendar year, as indexed). Because the 401(k) plan has certain administrative requirements and IRS compliance testing and reporting, the Principal Financial Group suggests full-service recordkeeping for this retirement plan. For a 401(k) proposal to suit your needs, please ask your trusted financial professional to complete a Proposal Request. 4

7 I thought a 401(k) plan was only for big companies. The Principal helped me put a plan in place with competitive administrative costs. Name Income Employee Salary Deferral Employer Match Total Contribution Owner Group Owner 1 $265,000 $18,000 $3,975 $21,975 Owner 2 $155,000 $12,400 $2,325 $14,725 Owners Total $420,000 $30,400 $6,300 $36,700 Employee Group Average Employees 1-5 $50,000 $3,000 $750 $3,750 Employees 6-20 $25,000 $1,500 $375 $1,875 Employees Total $625,000 $37,500 $9,375 $46,875 Grand Total $1,045,000 $67,900 $15,675 $83,575 Tax Savings at 31% $4,860 Net Employer Cost $10,815 Owners receive 44% of contributions Cost of plan as a percentage of payroll is 8% Vesting schedule may reduce costs of employer contributions The potential cost... The growth for owner 1 of a $21,975 annual plan contribution assuming a 7% annual return over 20 years = $985,912* Total annual tax-deductible contributions ($21,975 x 20 years) = - $439, of not having a plan = $546,412 For illustrative purposes only. * Hypothetical fixed annual rate of return of 7 percent does not guarantee any future returns nor represent the returns of any particular investment. Actual results will vary. The effects of income and capital gains taxes are not demonstrated. This information should not be considered indicative of future results. Principal value and return of investment options will fluctuate. Account value at redemption may be more or less than the original amount. This is the potential cost of not having a plan over a period of 20 years. 5

8 Safe Harbor 401(k) plan The Safe Harbor 401(k) plan allows your company to enjoy the benefits of a traditional 401(k) plan without many of its complex rules. 1 Better yet, it may allow higher contribution levels than a traditional 401(k) plan. The plan s major advantages are: No complicated non-discrimination testing Additional profit sharing contributions are allowed with a vesting schedule Employees may make pre-tax salary deferrals of up to $18,000 2 Individuals age 50 and older are allowed to make a $6,000 2 catch-up contribution if meeting the IRS pre-tax deferral limit Two contribution choices 3 1) Match 100% of the first 3% of compensation, plus 50% of the next 2% of compensation 4 2) Contribute 3% of compensation to all eligible employees (satisfying the required minimum top-heavy contribution) 4 This plan combines the administrative ease of the Savings Incentive Match Plan for Employees (SIMPLE-IRA) with the contribution flexibility of a 401(k) plan, thus allowing you to truly maximize your salary deferral contributions. Case study 2 owners 16 full-time eligible employees $600,000 in payroll 3% required contribution Employee group deferring 4% Consider this... In this example, a Safe Harbor 401(k) plan can help the owners save a total of $42,600 a year and contribute to their employees retirement accounts for a net cost of only $12,420 after annual tax savings. 1 Eligible employees must be notified prior to plan start date. 2 As indexed by the IRS for the 2016 calendar year. For purposes of maximum contributions, compensation is limited to $265,000, as indexed, per participant per year. 3 Deferrals and required employer contribution and optional additional profit sharing contributions cannot exceed the lesser of 100 percent of pay or $53,000 per participant. Total employer contribution to plan cannot exceed 25 percent of total eligible compensation (2016 tax year, as indexed). Enhanced matching options also available. 4 Employees are 100 percent vested in required employer contribution. 6

9 My partner and I almost doubled our deferrals after switching from a traditional 401(k) to the Safe Harbor 401(k), and our employees each receive a contribution for their own retirement. Name Income Employee Salary Deferral Employer 3% Contribution Total Owner Group Owner 1 $120,000 $18,000 $3,600 $21,600 Owner 2 $100,000 $18,000 $3,000 $21,000 Owners Total $220,000 $36,000 $6,600 $42,600 Employee Group Average Employees 1-4 $35,000 $1,400 $1,050 $2,450 Employees 5-16 $20,000 $800 $600 $1,400 Employees Total $380,000 $15,200 $11,400 $26,600 Grand Total $600,000 $51,200 $18,000 $69,200 Tax Savings at 31% $5,580 Net Employer Cost $12,420 Owners able to maximize their retirement savings by increased salary deferral amounts Great fit for owners who expect poor 401(k) participation The potential cost... The growth for owner 1 of a $21,600 annual plan contribution assuming a 7% annual return over 20 years = $969,088* Total annual tax-deductible contributions ($21,600 x 20 years) = - $432, of not having a plan = $537,088 For illustrative purposes only. * Hypothetical fixed annual rate of return of seven percent does not guarantee any future returns nor represent the returns of any particular investment. Actual results will vary. The effects of income and capital gains taxes are not demonstrated. This information should not be considered indicative of future results. Principal value and return of investment options will fluctuate. Account value at redemption may be more or less than the original amount. This is the potential cost of not having a plan over a period of 20 years. 7

10 SIMPLE-IRA The SIMPLE-IRA is an economical way to sponsor a retirement plan, because employees may elect to defer part of their salaries into the plan along with the contributions you make. Its low cost and easy administration make it appealing to many small business owners with 100 or fewer employees who do not maintain another retirement plan. The plan s major advantages are: No plan compliance testing or annual Form 5500 filing required No employer administration fee Contribution maximum: Employee salary deferral is 100% of compensation up to $12,500 1 Individuals age 50 and older are allowed to make a $3,000 1 catch-up contribution if meeting the IRS pre-tax deferral limit Employer contributions are federally tax deductible, and contributions and earnings are tax deferred Two SIMPLE contribution choices Under the SIMPLE-IRA, employers must make contributions in one of two ways. Employees are 100 percent vested in all contributions. 1) 3% match You match your employees contributions dollar-for-dollar, up to 3% of each eligible employee s gross salary. (Matching contribution cannot exceed $12,500 1 annually unless the participant is over age 50.) In two years of any five-year period, you can elect to reduce the match to as low as 1% of salary. 2) 2% contribution You contribute 2% of all eligible employees gross salaries whether or not they elect to participate in the plan. Case study 6 full-time eligible employees 2 owners and 1 spouse 3% match Consider this... In this example, a SIMPLE-IRA can help the owners save a total of $51,400 a year and contribute to the employees retirement accounts for a net cost of only $13,317 after taxes. 1 As indexed by the IRS for the 2016 calendar year. 8

11 The SIMPLE-IRA looks and feels like a 401(k) plan but can be simpler and less costly. Name Income Employee Salary Deferral Employer Match Total Contribution Owner Group Owner 1 $383,350 $12,500 $11,500 $24,000 Owner 2 $65,000 $12,500 $1,950 $14,450 Owner Spouse $15,000 $12,500 $450 $12,950 Owners Total $463,350 $37,500 $13,900 $51,400 Employees 1-6 $30,000 $900 $900 $1,800 Employees Total $180,000 $5,400 $5,400 $10,800 Grand Total $643,350 $42,900 $19,300 $62,200 Tax Savings at 31% $5,983 Net Employer Cost $13,317 Great fit for employers who want a 401(k) plan but expect poor participation Especially appealing if owner or owner s spouse has low earned income Simple to administer, low-cost retirement plan but has limited flexibility Loans, vesting schedule and additional employer contributions are not allowed The potential cost... The growth for owner 1 of a $24,000 annual plan contribution assuming a 7% annual return over 20 years = $1,076,764* Total annual tax-deductible contributions ($24,000 x 20 years) = - $480, of not having a plan = $596,764 For illustrative purposes only. * Hypothetical fixed annual rate of return of seven percent does not guarantee any future returns nor represent the returns of any particular investment. Actual results will vary. The effects of income and capital gains taxes are not demonstrated. This information should not be considered indicative of future results. Principal value and return of investment options will fluctuate. Account value at redemption may be more or less than the original amount. This is the potential cost of not having a plan over a period of 20 years. 9

12 Profit sharing plans A profit sharing plan is a retirement plan that lets your company make discretionary contributions for your employees. The main advantages of a profit sharing plan are: Helps attract and keep quality employees Provides plan design flexibility Allows varying levels of contributions each year Helps to motivate employees Allocation formulas Allocation formulas play an important part in designing a profit sharing plan. The IRS requires a specific, predetermined formula for allocating profits to employees. The four formulas to choose from are described here: Pay-to-Pay: Based on participant s pay. Each participant receives an allocation based on the ratio of his or her eligible pay to the total payroll of all plan participants. Integrated: Allows you to give a larger percentage of the contribution to higher-paid participants for wages above a pre-selected amount. This method integrates the plan with a participant s Social Security benefit. Age-Weighted: Gives each participant a share of the contribution based on his or her age and compensation compared to other participants. This results in older participants with higher salaries receiving a larger share of the plan contributions. Comparability: Contribution is tailored to a specific group. Attempts to maximize the contributions given to a select group of your most valued plan participants while giving the minimum contributions necessary to pass required testing to the remaining participants. Identifying factors for your select group may include age, title or ownership.* * May be an additional cost for testing. 10

13 Consider this... The chart below shows an example of how the same plan contribution amount ($101,947) can be allocated given the various allocation methods. Name Age Income Pay-to-Pay Contribution Integrated Contribution Age-Weighted Contribution Comparability Contribution Owner Group Highly Compensated Owner 1 51 $260,000 $37,812 $39,917 $36,226 $46,428 Owner 2 57 $260,000 $37,812 $39,917 $52,000 $46,428 Owners Total $520,000 $75,624 $79,833 $88,226 $92,855 % of Budget 74% 78% 87% 91% Non-Highly Compensated Employee 1 27 $18,000 $2,618 $2,199 $354 $904 Employee 2 37 $24,000 $3,490 $2,932 $1,067 $1,206 Employee 3 36 $15,000 $2,181 $1,833 $615 $753 Employee 4 60 $30,000 $4,363 $3,665 $8,711 $1,507 Employee 5 29 $28,000 $4,072 $3,421 $648 $1,406 Employee 6 31 $20,000 $2,909 $2,444 $545 $1,005 Employee 7 39 $21,000 $3,054 $2,566 $1,099 $1,055 Employee 8 31 $25,000 $3,636 $3,054 $681 $1,256 Employees Total $181,000 $26,323 $22,114 $13,721 $9,092 Grand Total $701,000 $101,947 $101,947 $101,947 $101,947 Tax Savings at 31% $31,604 $31,604 $31,604 $31,604 Net Employer Cost $70,343 $70,343 $70,343 $70,343 Changes in employee group can change allocation. For illustrative purposes only. 11

14 SEP-IRA The Simplified Employee Pension (SEP-IRA) is a great program for small businesses and the self-employed. The plan s major advantages are: You decide the percentage you wish to contribute each year, up to 25% of compensation or $53,000, whichever is less 1 No requirements on the frequency or amount of contributions Easy to establish No employer administration fee No annual Form 5500 required No IRS reporting requirements, and paperwork is minimal This plan enables you to make discretionary, federally tax-deductible contributions for yourself and your eligible employees. You are only required to contribute for employees who: Are age 21 or older Have worked for your business for three of the past five years You may designate less restrictive requirements. Establishing a SEP requires an IRA be established for each eligible employee. You make contributions directly to your employees IRAs. Case study 2 owners, 1 owner s spouse, and 1 employee Goal: to maximize contributions to owner Consider this... In this example, a SEP-IRA can help the owners save $53,000 a year and contribute to the employees retirement accounts for a net cost of only $36,570 after taxes. 1 As indexed by the IRS for the 2016 calendar year. 12

15 The SEP-IRA is a simple, flexible and cost-effective solution to retirement needs. Name Date of Hire Salary Employer 20% Contribution Owner Group Owner $265,000 $53,000 Owner $15,000 $3,000 Owner Spouse 2015 $35,000 Not Eligible Employee $22,000 Not Eligible Total $337,000 $56,000 Tax Savings at 31% $16,430 Net Employer Cost $36,570 Owner receives 95% of total contribution Turnover may allow employee exclusions Employees are 100% vested in employer contributions Most effective if owner s earned income is over $53,000 (If less, consider SIMPLE-IRA) The potential cost... The growth of a $53,000 annual plan contribution for the owner assuming a 7% annual return over 20 years = $2,377,851* Total annual tax-deductible contributions ($53,000 x 20 years) = - $1,060, of not having a plan = $1,317,851 For illustrative purposes only. * Hypothetical fixed annual rate of return of seven percent does not guarantee any future returns nor represent the returns of any particular investment. Actual results will vary. The effects of income and capital gains taxes are not demonstrated. This information should not be considered indicative of future results. Principal value and return of investment options will fluctuate. Account value at redemption may be more or less than the original amount. This is the potential cost of not having a plan over a period of 20 years. 13

16 The subject matter in this communication is provided with the understanding that The Principal is not rendering legal, accounting or tax advice. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax or accounting obligations and requirements. Insurance products and plan administrative services are provided by Principal Life Insurance Company. Principal Funds, Inc. is distributed by Principal Funds Distributor, Inc. Securities are offered through Princor Financial Services Corporation, , Member SIPC and/or independent broker/dealers. Securities sold by a Princor Registered Representative are offered through Princor. Principal Funds Distributor, Princor and Principal Life are members of the Principal Financial Group, Des Moines, IA The testimonials contained within this communication may not be representative of the experience of other clients. They are no guarantee of future performance or success. No fees were paid for the testimonials. principal.com 2015 Principal Financial Services, Inc. MM /2015 t cc