Retirement Plan Design Opportunities for Small Businesses

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1 Retirement Plan Design Opportunities for Small Businesses 1

2 Retirement Plan Advantages Tax deductible contributions Tax-deferred growth of earnings Wealth diversifier Employee recruitment and retention tool Potentially protected from creditors 2

3 Eligible Business Entities Sole proprietorship Partnership Corporation Sub-chapter S corporation Limited Liability Corporation (LLC) or Limited Liability Partnership (LLP) 3

4 Owner-Only Businesses 4

5 Owner-Only Businesses Typically includes businesses where: There are no employees other than the owners and their spouses or, There are employees who are not eligible to participate because they do not meet the years of service or full-time employment requirements 5

6 Owner-Only Businesses Three primary types of retirement plans: SEP IRAs Uni-401(k)s Owner-Only Defined Benefit Plans 6

7 SEP IRAs Discretionary annual contributions up to 25% of compensation, not to exceed $53,000 Employees with less than three years of service may be excluded Low administration fees and no annual IRS filing requirement May be established and funded up until the business tax-filing deadline, including extensions 7

8 Uni-401(k)s Discretionary annual contributions up to 25% of compensation, plus a $18,000 salary deferral ($24,000 if age 50 or older), not to exceed $53,000 ($59,000 if age 50 or older) Part-time employees (less than 1,000 hours) may be excluded Allows rollover contributions from other plans and loans Higher administrative fees than SEP IRAs but may allow higher contribution amounts Must be established by December 31 st for the current year, but does not need to be funded until the tax-filing deadline including extensions 8

9 Comparing Contributions to a SEP IRA and Uni-401(k) Plan W-2 Compensation Maximum SEP IRA Contribution Maximum Uni-401(k) Contribution Percentage Increase in Contributions $40,000 $10,000 $28, % $80,000 $20,000 $38,000 90% $120,000 $30,000 $48,000 60% $160,000 $40,000 $53, % $200,000 $50,000 $53,000 6% Contribution limits are subject to change annually for cost of living adjustments 9

10 Owner-Only Defined Benefit Plans Ideal for a business owner who would like to contribute significantly more than the $53,000 limit for SEP IRA and Uni-401(k)s The older the business owner, the larger the annual contribution Contribution amounts can be adjusted by amending the plan document Higher administrative fees than a Uni-401(k), but significantly higher contributions Must be established by December 31 st for the current year, but does not need to be funded until the tax-filing deadline, including extensions 10

11 Owner-Only Defined Benefit Plans Age W-2 Wages DB Contribution & 401(k) Contributions Owner- Only 401(k) DB+k Advantage 40 $265,000 $118,838 $53,000 $65, $185,000 $195,069 $59,000 $136, $100,000 $227,731 $49,000 $178,731 Source: Benetech Assumed retirement age 65 11

12 Businesses with Employees 12

13 Businesses with Employees Typically, business owners are interested in maximizing the contributions of certain participants, such as themselves, while minimizing the funding obligations of other participants 13

14 Simple IRA Allows salary deferral contributions up to $12,500 ($15,500 if age 50 or older) Mandatory employer contribution equal to: Dollar-for-dollar match up to 3% of compensation or 2% contribution for all eligible employees In any two out of five years, the employer match can be as low as 1% of compensation No additional contributions are allowed and must be the employer s only plan May exclude employees with less than two years of service Must be established by October 1 st for the current year 14

15 Simple IRA: Case Study W-2 Compensation Assumed Salary Deferral 3%Dollarfor-Dollar Match Total Contribution Owner $100,000 $12,500 $3,000 $15,500 Employee 1 $50,000 $5,000 $1,500 $6,500 Employee 2 $30,000 $0 $0 $0 15

16 401(k) Profit Sharing Plans Allows salary deferral contributions up to $18,000 ($24,000 if age 50 or older) Additional discretionary profit sharing and/or matching contributions can be made up to 25% of eligible payroll Complex actual deferral percentage (ADP) and top-heavy testing requirements pose significant challenges to small businesses 16

17 Safe Harbor 401(k) Profit Sharing Plans Eliminates ADP and top-heavy testing Mandatory employer contribution: Dollar-for-dollar match up to 4% of compensation or 3% uniform contribution for all eligible employees Additional profit sharing and/or matching contributions are allowed Must be established by October 1 st for the current year 17

18 Safe Harbor 401(k): Case Study W-2 Compensation Assumed Salary Deferral 4%Dollarfor-Dollar Match Total Contribution Owner $100,000 $18,000 $4,000 $22,000 Employee 1 $50,000 $5,000 $2,000 $7,000 Employee 2 $30,000 $0 $0 $0 18

19 Profit Sharing Allocations For those businesses that establish a Safe Harbor 401(k) plan but wish to contribute additional amounts can do so using one of three allocation methods: Uniform: same percentage of pay Integrated: participants earning above the taxable wage base ($118,500 in 2015) receive a higher percentage of pay Tiered: older participants receive a higher percentage of pay 19

20 Tiered Allocation Different allocation rates are given to different categories of employees Dramatically favors older owners, while minimizes employee funding obligations (may be as low as 5% of compensation) When combined with a Safe Harbor 401(k) plan, the 3% contribution for all eligible employees, rather than the 4% match, works better to satisfy compliance testing 20

21 Tiered Safe Harbor 401(k) Plan: Case Study Age Salary Typical 401(k) Tiered 401(k) Owner 1 51 $125,000 $55,250 $59,000 Owner 2 55 $125,000 $55,250 $59,000 Employee 1 50 $55,000 $13,750 $4,282 Employee 2 41 $36,000 $9,000 $2,804 Employee 3 32 $32,000 $8,000 $2,492 Employee 4 27 $25,000 $6,250 $1,947 Employee 5 39 $25,000 $6,250 $1,947 Total (including Owner s deferral): $153,750 $131,474 Decrease in Company Contribution: ($22,276) Source: Benetech 21

22 Cash Balance Plans Type of defined benefit plan May be combined with a Safe Harbor 401(k) plan to provide the maximum contributions to owners (maybe well in excess of $100,000), while minimizing employees funding obligations (may be as low as a 7.5% profit sharing contribution and minimum cash balance accrual) Appropriate for businesses with stable cash flow and should be maintained and funded for at least five years 22

23 Cash Balance Plan: Case Study Age W-2 Salary Assumed Employee Deferrals Company Contributions Owner 1 50 $265,000 $24,000 $172,971 Owner 2 55 $265,000 $24,000 $172, Employees $425, $33,060 Total Company Contributions: $379,002 Total/Percentage to Owners: $345,941/91% Source: Benetech Assumed retirement age 65 23

24 Year-End Action Steps 24

25 Action Steps Existing money purchase plans should be terminated or merged into a profit sharing plan Owner-only 401(k) plans with assets greater than $250,000 must file an IRS-Form 5500 Business owners who wish to contribute significantly more than $53,000 should consider a cash balance plan 25

26 Action Steps SEP plans with non-owner employees becoming eligible next year should consider switching to a profit sharing plan Keogh plans with eligible employees should consider switching to a profit sharing plan that allows the tiered allocation method SIMPLE IRA plans should be reviewed to see if a Safe Harbor 401(k) plan would be more beneficial next year Safe Harbor 401(k) plans that current contribute only the 4% match should do a cost/benefit analysis of adding a tiered allocation profit-sharing formula 26

27 Please consider the charges, risks, expenses and investment objectives carefully before investing. For a prospectus or, if available, a summary prospectus containing this and other information, please call Janus at JANUS (52687) or download the file from janus.com/info. Read it carefully before you invest or send money. The tax information contained herein is provided for informational purposes only and should not be construed as legal or tax advice. Your clients circumstances may change over time so it may be appropriate for you and your client to evaluate tax strategy with the assistance of a professional tax advisor. Federal and state tax laws and regulations are complex and subject to change. Laws of a particular state or laws that may be applicable to a particular situation may have an impact on the applicability, accuracy, or completeness of the information contained in this document. Janus does not have information related to and does not review or verify your clients financial or tax situation. Janus is not liable for your use of, or any tax position taken in reliance on, such information. A retirement account should be considered a long-term investment. Retirement accounts generally have expenses and account fees, which may impact the value of the account. Non-qualified withdrawals may be subject to taxes and penalties. For more detailed information about taxes, consult a tax attorney or accountant for advice. This document is not intended to be legal or fiduciary advice or a full representation of all responsibilities of plan sponsors or advisors. Janus Distributors LLC C