Small Business Week: Retirement Plans

April 13 – 17 is National Retirement Planning Week®.

If you're self-employed or own a small company and you haven't established a retirement savings plan, this is the perfect time to review the situation. A retirement plan can assist you and your employees save for the future.

Tax advantages

A retirement plan may have significant tax advantages:

• Your contributions are deductible when created.
• Your contributions aren't taxed to an employee until distributed from the plan.
• Money in the retirement program grows tax deferred (or, in the case of Roth accounts, possibly tax free).

Kinds of plans

Retirement plans are typically either IRA-based (like SEPs and SIMPLE IRAs) or "qualified" (like 401(k)s, profit-sharing plans, and defined benefit plans). Qualified plans are generally more complicated and expensive to maintain than IRA-based plans because they have to adhere to specific Internal Revenue Code and ERISA (the Employee Retirement Income Security Act of 1974) requirements in order to qualify for their tax benefits. Also, qualified plan assets must be stored either in trust or by an insurance company. With IRA-based plans, your employees own (i.e., "vest" in) your contributions immediately. With qualified plans, you can typically require that your employees work a certain numbers of years before they vest.

Which plan is right for you?

With a dizzying array of retirement plans to choose from, each with unique advantages and drawbacks, you'll have to precisely define your objectives before trying to choose a plan. For instance, do you want:.

• To make the most of the amount you can save for your own retirement?
• A plan funded by employer contributions? By employee contributions? Both?
• A plan that enables you and your employees to make pretax and/or Roth contributions?
• The flexibility to avoid employer contributions in some years?
• A plan with lowest costs? Easiest administration?

The answers to these concerns can help guide you and your retirement professional to the plan (or combination of plans) most suitable for you.

SEPs

A SEP allows you to establish an IRA (a "SEP-IRA") for yourself and each of your qualified employees. You contribute a uniform percentage of pay for each employee, although you don't have to make contributions every year, offering you some flexibility when business conditions vary. For 2014, your contributions for each employee are limited to the lesser of 25 % of pay or $52,000. Most employers, including those who are self-employed, can establish a SEP.

SEPs have low start-up and operating costs and can be established using an easy two-page form. The plan must cover any employee aged 21 or older who has worked for you for three of the last five years and who earns $550 or more.

SIMPLE IRA plan

The SIMPLE IRA plan is available if you have 100 or fewer employees. Employees can elect to make pretax contributions in 2014 of up to $12,000 ($14,500 if age 50 or older). You must either match your employees' contributions dollar for dollar– up to 3 % of each employee's compensation– or make a fixed contribution of 2 % of compensation for each eligible employee. (The 3 % match can be reduced to 1 % in any two of five years.) Each employee who earned $5,000 or more in any two prior years, and who is expected to earn at least $5,000 in the current year, must be allowed to participate in the plan.

SIMPLE IRA plans are easy to set up. You fill out a short form to establish a plan and ensure that SIMPLE IRAs are set up for each employee. A financial institution can do much of the paperwork. Additionally, administrative costs are low.

Profit-sharing plan

Typically, only you, not your employees, contribute to a qualified profit-sharing plan. Your contributions are discretionary– there's usually no set amount you need to contribute each year, and you have the flexibility to contribute nothing at all in a given year if you so choose (although your contributions must be nondiscriminatory, and "substantial and recurring," for your plan to remain qualified). The plan must contain a formula for determining how your contributions are allocated among plan participants. A separate account is established for each participant that holds your contributions and any investment gains or losses. Generally, each employee with a year of service is eligible to participate (although you can require two years of service if your contributions are immediately vested). Contributions for any employee in 2014 can't exceed the lesser of $52,000 or 100 % of the employee's compensation.

401(k) plan

The 401(k) plan (technically, a qualified profit-sharing plan with a cash or deferred feature) has become a hugely popular retirement savings vehicle for small businesses. According to the Department of Labor, an estimated 61 million American workers are enrolled in 401(k)-type plans with total assets of about 3.2 trillion dollars. (Source: Department of Labor, Employee Benefits Security Administration Fact Sheet, June 2013.) With a 401(k) plan, employees can make pretax and/or Roth contributions in 2014 of up to $17,500 of pay ($23,000 if age 50 or older). These deferrals go into a separate account for each employee and aren't taxed until distributed. Generally, each employee with a year of service must be allowed to contribute to the plan.

You can also make employer contributions to your 401(k) plan– either matching contributions or discretionary profit-sharing contributions. Combined employer and employee contributions for any employee in 2014 can't exceed the lesser of $52,000 (plus catch-up contributions of up to $5,500 if your employee is age 50 or older) or 100 % of the employee's compensation. In general, each employee with a year of service is eligible to receive employer contributions, but you can require two years of service if your contributions are immediately vested.

401(k) plans are demanded to perform rather complicated testing each year to make sure benefits aren't disproportionately weighted toward higher paid employees. However, you don't have to perform discrimination testing if you adopt a "safe harbor" 401(k) plan. With a safe harbor 401(k) plan, you generally have to either match your employees' contributions (100 % of employee deferrals up to 3 % of compensation, and 50 % of deferrals between 3 and 5 % of compensation), or make a fixed contribution of 3 % of compensation for all eligible employees, regardless of whether they contribute to the plan. Your contributions must be fully vested.

Another way to avoid discrimination testing is by adopting a SIMPLE 401(k) plan. These plans are similar to SIMPLE IRAs, but can also allow loans and Roth contributions. Because they're still qualified plans (and therefore more complicated than SIMPLE IRAs), and allow less deferrals than traditional 401(k)s, SIMPLE 401(k)s haven't become popular.

Defined benefit plan

A defined benefit plan is a qualified retirement plan that ensures your employees a specified level of benefits at retirement (for instance, an annual benefit equal to 30 % of final average pay). As the name suggests, it's the retirement benefit that's defined, not the level of contributions to the plan. In 2014, a defined benefit plan can provide an annual benefit of up to $210,000 (or 100 % of pay if less). The services of an actuary are generally needed to determine the annual contributions that you must make to the plan to fund the promised benefit. Your contributions may vary from year to year, depending on the performance of plan investments and other factors.

In general, defined benefit plans are too costly and too complex for most small businesses. However, because they can provide the largest benefit of any retirement plan, and therefore allow the largest deductible employer contribution, defined benefit plans could be attractive to businesses that have a small group of highly compensated owners who are seeking to contribute as much money as possible on a tax-deferred basis.

As an employer, you have an important role to play in helping America's workers save. Now is the time to check out retirement plan programs for you and your employees.

IMPORTANT DISCLOSURES

Material contained in this article is provided for information purposes only and is not intended to be used in connection with the evaluation of any investments offered by David Lerner Associates, Inc. This material does not constitute an offer or recommendation to buy or sell securities and should not be considered in connection with the purchase or sale of securities.

David Lerner Associates does not provide tax or legal advice. The information presented here is not specific to any individual's personal circumstances.

To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.

These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable– we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.

Some of this material has been provided by Broadridge Investor Communications Solutions, Inc.

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