retirement plans for small employers autumn long...retirement plans for small employers autumn long....
TRANSCRIPT
Retirement Plans for Small Employers
Autumn Long
Realm of Possibilities
• Payroll Deduction IRAs
• SEPs
• Profit Sharing Plans
• SIMPLEs
• 401(k) Plans
• Defined Benefit Pension Plans
• Why?
But first…
Why Small Employers NeedRetirement Plans
Why Business OwnersNeeds Retirement Plans
Costs of CoveringEmployees
IRAs and Qualified Plans
• PayrollDeductionIRAS
• SEPs
• SIMPLEs
• 401(k)
• Defined BenefitPension
• DefinedContributionPension
• Profit Sharing
• ESOPs
Qualified Plan v. Other Options
• Administrative costs
– Reporting, disclosures, funding, determinationletters
• Coverage
– SEP/SIMPLE have less flexibility
• Vesting
– SEP/SIMPLE immediately vested
• Contributions - employer or employee
– Class variations not allowed in SEP/SIMPLE
IRA Overview
Contribution Limits
• Lesser of $5,500 or 100% of earnings fromemployment
• $1,000 catch-up contributions for those over50 by year end
• Aggregate limit – all IRAs and Roth• Compensation
• Earnings from personal services• Does not include
• Investment earnings• Pensions• Annuities
Excess Contributions
• Contribute beyond limit
• Contribute over age 70 ½
• Improper rollover
• Excess contributions subject to a 6%penalty each tax year
• Withdraw before tax-year due datewithout penalty (must withdrawinterest)
• Can “use up” in following years
Re-characterization
• Treat contribution made to one typeof IRA as made to another type ofIRA
• Transfer from first IRA by the duedate, plus extensions, of tax return
• Include income attributable tocontribution
IRA Contributions• Before April 15
• Must be under age 70-1/2
• Must have compensation from employment—spousal IRA exception
• If meet these conditions can always makenondeductible contributions
• If single and not “active participant” (ormarried and neither spouse is activeparticipant) can always make deductiblecontribution
– Reason: No pension, then you can create yourown deductible IRA
Active Participant Status
• Any tax-advantaged plan (excludesnonqualified)
• Any portion of the plan year ending with orwithin the individual’s tax year (e.g. specialrule for fiscal year plans!)
• Defined benefit—active unless excludedfrom plan’s eligibility provisions
• Defined contribution—must receiveallocation of contribution (including salarydeferrals) or forfeitures
Deduction Phase Outs
• Deduction phased out if individual is“active participant” and earnings exceed
– Married filing joint: $98,000 to $118,000 (2015)
– Single: $61,000 to $71,000 (2015)
• Deduction phased out if individual is notactive participant but spouse is and theyfile jointly and earnings exceed
– $183,000 - $193,000 (2015)
Roth Contributions• Allowed after age 70½
• Earnings from employment—spousalIRAs
• Eligibility tied solely to AGI
• Contribution phased out
– Single $116,000 and $131,000 (2015)
– Joint filers $183,000 and $193,000(2015 indexed)
Roth Tax Treatment
• Qualifying withdrawals
– Contributions and earnings withdrawntax-free
– Requires maintaining account for 5years and satisfying trigger event
• Nonqualifying withdrawals
– Contributions withdrawn first tax-free
– Earnings taxed as with traditional IRAplus penalties
Roth v. Deductible IRA
• Consider current/future tax rates
– Increasing tax rates Roth is better
– Decreasing tax rates ded’l IRA is better
– Same tax rates both get same result
• No required minimum distributions
• Good for those expecting rising taxrates
• Tax diversification
Roth Conversions
• A traditional IRA, qualified plan, 403(b)annuity, or 457 plan can be converted to aRoth IRA
• No income or tax filing restrictions• Conversion must occur by 12/31• Taxable portion is treated as taxable income• No 10% early withdrawal penalty at
conversion, however withdrawals within 5year will be
• Re-characterization—can undo conversion upto following Oct. 15
Roth Conversions Cont’d• Consider current and future tax rates
• Pay taxes from outside source
• Avoid required minimum distributions
• Eliminate future tax liability
• Conversion increases AGI
• Future withdrawals do not increaseAGI
• Conversion reduces the taxableestate
Conversion Candidates• Top tax bracket and expect rates to
rise
• Client with cash on hand for taxes
• Anyone able to convert at a low taxrate
• Do not need withdrawals to meetexpenses
• Taxpayers facing estate tax
• Taxpayers needing tax diversification
Avoid Conversion
• Those likely to be in a lower incometax bracket in retirement
• Those struggling to meet retirementneeds
Investment Prohibitions• Life insurance
• Collectibles– Exception for certain federal government coins
– Exception for gold, silver, palladium, and platinum bullion
• Prohibited transactions include– Borrowing money from the IRA
– Selling property to it
– Receiving unreasonable compensation for managing it
– Using it as security for a loan
– Buying property for personal use (present or future) withIRA funds
• A disqualified person’s transfer of plan income or assets to,or use of them by or for his or her benefit
• A fiduciary’s act by which he or she deals with planincome or assets in his or her own interest
• A fiduciary’s receipt of consideration for his or her ownaccount in a transaction that involves plan income or assetsfrom any party dealing with the plan
• Any of the following acts between the plan and a disqualifiedperson:
– Selling, exchanging, or leasing property
– Lending money or extending credit
– Furnishing goods, services or facilities
Prohibited Transactions
IRAs and Qualified Plans
• PayrollDeductionIRAS
• SEPs
• SIMPLEs
• 401(k)
• Defined BenefitPension
• DefinedContributionPension
• Profit Sharing
• ESOPs
• Employees est. IRA (Roth orTraditional)
• Employees authorize payrolldeduction
• Employer acts as conduit
• Easy to implement/terminate
• Out of sight…
Payroll Deduction IRAs
• New in 2014
• IRA limitations apply
• Roth IRA (after tax contributions)
• Invested solely in government bondsand backed by US
• No fees on accounts
• No costs for employers
MyRA Program
SEP
• Simple to maintain
• Similar to profit-sharing
– Discretionary contributions
– 25% maximum deductible contribution
– 415(c) limit ($53,000 in 2015).
– Withdrawal flexibility (in-servicedistributions required)
SEPs Cont’d
• Funded with IRAs
• No annual reporting
• Simple document requirements
Other SEP Limits
• No salary deferrals allowed unlessgrandfathered SARSEP
– SARSEPs limited to small ERs and est’dbefore 12.31.1996
• Affiliation rules apply
– Must cover EEs in related companies
• Top-heavy rules apply
– But little effect
Why a SEP
• Avoid annual commitment
• Administrative convenience
• Many short-term employees
• Not focused on:
– Adequate retirement savings
– Easy communication
– Long-term employees
– Flexibility or allocation options
SEP Pitfalls
1. SEPs require 100% vesting2. No investments in life insurance3. No loans4. Allocation formula limited to level
allocation of Social Security Integration5. Rigid Eligibility
• Must be eligible for following year if:• 21• 3 YOS in last five years• $600 earnings
(Consider a PSP Instead)
SEP v. Profit Sharing
• Simple administration
– No Form 5500 ifuse a prototype
• Allocation methodlimited
• 100% vesting
• 3 YOS reqmt (PTEs)
• No participant loans
• Complex admin.
• Allocation method isquite flexible
• 3-year cliff vesting
• Cover full-timeemployees 1 year ofservice (exceptions)
• Participant loans
Why Profit Sharing?
• Discretionary contributions
• Withdrawal flexibility
• Allocation formula
– Level percentage of compensation
– Integration with Social Security (permitteddisparity)
– Age-weighted or cross-tested
• Substantial and recurring contributions
Choosing a Profit-Sharing Plan
For
• Contribution flexibility
• Withdrawal flexibility
• Allocation flexibility(Allocate more to keyemployees)
• Cash flow concerns
• Not focused onretirement vehicle
• Motivational
Against
• Unpredictable benefits
• Discretionarycontributions don’t =employee confidence
• Employee bears risk
Comparison between Profit-Sharing and SEP Plans
Feature Profit-Sharing SEP
Coverage Must satisfy the coveragerequirements of 410(b)—whichallow some exclusions
Must cover all employees that haveearned $600 in any three of the fiveprevious years.
Vesting Profit-sharing contributions canuse statutory vesting schedules.
Immediate and full vesting on allaccounts.
ContributionLimits
415(c) limit ($53,000 in 2015).25% deduction limit
415(c) limit ($53,000 in 2015). 25%deduction limit
Flexibility Discretionary contributions. Discretionary contributions
Participantloans
Yes No
Withdrawalrestrictions
Plan can allow for liberalwithdrawals.
Withdrawals at any time
Investmentlimitations
Only limited by fiduciary rulesincluding prohibited transactionrules.
Limited by prohibited transactionrules and IRA prohibitions on lifeinsurance and collectibles
SIMPLE• Employer cannot maintain any other tax-
advantaged plan (e.g., SEP, 401(k))
• ER has 100 or fewer EEs (earning $5K +)
• Eligibility—must cover those who earn$5,000 in two prior years and expected tocontinue
• Defer $12,500 (indexed 2015)
• Additional $3,000 deferral for those overage 50
SIMPLE• Employer contribution must be either
– 100 percent match on first 3 percent deferral(can lower intermittently)
– 2 percent nonelective for all eligibleemployees
– These are the only choices—both floor andceiling
• Annual employee election window• Funded with IRAs
– no loans– no life insurance
• No discrimination testing
Why a SIMPLE
• Partnership between ER/EE forretirement savings
• Low maintenance; unfamiliar withretirement plans
• Not focused on:
– Skewing contributions in favor of HCEs
– Limiting participation
– Flexible contributions
SIMPLE v. 401(k)• Simple administration
• Lower salary deferral
• Rigid employercontribution reqmt
• Cover part-timeemployees 3 years ofservice
• No participant loans
• No 5500
• Complex admin.
• Higher salary deferral
• Flexible employercontribution
• Cover full-time with 1year of service (withexceptions)
• Participant loans
• Notice anddisclosures; 5500
401(k) Options
• Salary deferrals (CODA)
• Matching contributions
• Profit-sharing contributions
• After-tax employee contributions
• Roth elections
– Roth conversions
Salary Deferral Rules
• Salary deferrals 100% vested
• Salary deferral limits
– $18,000 (2015 indexed)
– $6,000 catch-up (2015)
– Limit applies to each plan
– Limit applies to individual aggregating 401(k),403(b) and SIMPLE contributions
Contribution limits
• Salary deferrals
• 25% deductible contribution
– Exclude salary deferrals
• 415(c) annual addition ($53,000 in 2015)
– Exclude $6,000 catch-up
• ADP and ACP tests can limit salary deferralsfor HCE (kick out $$)
Salary Deferral Withdrawals
• In-service with financial hardship or 59½
• General financial hardship test
• Safe-harbor hardship events
– Medical expenses
– Purchase, repair, or avoid foreclose of home
– College education
– Burial expenses
• Safe-harbor “reasonably available” requirement
– Receive all distributions and loans available first
– Suspend deferrals for 6 months
401(k) vs SIMPLEFeature 401(k) SIMPLE
Coverage Must satisfy the coverage requirements of410(b)—which allow some exclusions
Must cover employees that have earned$5,000 in any two previous years.
Vesting Employee full vesting. Profit-sharingstatutory vesting. Matching top-heavy.
Immediate and full vesting on all accounts.
Deferral limits $18,000 (as indexed for 2015)$6,000 catch-up contribution (2015)
$12,500 (as indexed for 2015)$3,000 catch-up contribution (2015)
Contributionflexibility
Matching contributions and/or non-electiveprofit-sharing contributions.
Choice between a stated matching contributionor a non-elective contribution.
Total contributions Salary deferrals plus employercontributions total $51,000 (limit for 2013)
Total contribution can equal salary deferralplus the stated employer contribution.
Nondiscriminationtesting.
ADP test applies to salary deferrals. ACPapplies to matching contributions. Profit-sharing satisfy 401(a)(4)
No nondiscrimination testing required.Employer contributions are subject to veryspecific limits.
Participant loans Yes No
Withdrawalrestrictions
Hardship withdrawals on the salarydeferral account. More liberal on the profit-sharing and matching
Withdrawals at any time. However, as with anydistribution they subject to income taxconsequences.
Investmentrestrictions
Only limited by fiduciary rules includingprohibited transaction rules.
Limited by prohibited transaction rules and IRAprohibitions on life insurance and collectibles
• Benefits promised at retirement
• Huge liability for employer
• Significant attraction/retention tool
Defined Benefit Plans
Defined-Benefit Formulas
• Unit-benefit (most common)
– 1.5% of final average monthly compensation(FAC) x years of service (30 years x $10,000 x.015 = $4,500)
• Flat percentage of earnings (no service)
– 40 percent of FAC ($10,000 x .4 = $4,000)
• Flat amount per year of service (no comp)
– $50 a month x years of service
• Flat benefit (no service)
– $1,500 a month
Elements of Unit-Benefit
• Definition of compensation– Base/bonus/overtime/salary deferrals
– Nondiscrimination issues if less than total comp.
– Compensation limited to $265,000 (2015 indexed)
• Final average compensation̶ Highest 3/highest 5/highest 3 of final 5
• Years of service̶ Past service/years of participation
• Form of benefit̶ Life annuity, 10-year-certain and continuous (life or period)
• Normal retirement age (can be 62 or less)̶ 65 and 5 years of participation (latest of two)
Unit-Benefit Formula• David has a defined benefit plan that uses the
following unit-benefit formula:
• The annual lifetime pension payment will becalculated as:
Years ofservice X
Average ofHigh 3 yrssalary
X 0.025
Example: 30 yrs X $80,000 x 0.025 = $60,000
Choosing Defined Benefit
• Provide adequate retirement benefits forlong-service employees
• Provide benefits based on service priorto establishment of the plan
• Maximizing contributions (tax shelter)for the older business owner
– (salaries are higher for older businessowner)
Choosing Defined Benefit
• Investment risk is not on employee
• Annual financial commitment
• No predictable costs
• Administratively burdensome
• Communication is difficult
DB versus DC Approach
Defined-benefit• Specifies benefit
• Assets not allocated
• Investment risk withemployer
• Pre-retirement inflation
• Unpredictable costs
• Costly to administer
• Past service
• Not portable
Defined-contribution• Contribution/allocation
• Individual accounts
• Investment risk withemployees
• No inflation protection
• Predictable costs
• Less costly
• No past service
• Portable
DB/DC Rule Differences
Defined-benefit
• 415(b) benefit limit($210K)
• Subject to PBGC
• Minimumparticipation rule
• Deduction limitedby actuarial cost
• Longer vestingperiod
Defined-contribution
• 415(c) contributionlimit ($53K)
• No PBGC
• No minimumparticipation
• Deduction 25 percentof aggregate comp.
• Shorter vesting period
Pension vs Profit-SharingPension
• Required funding
• 10% of assets in sponsor’sstock
• Distribution requirestermination of employment(exception at age 62,NRA)
Profit-Sharing
• Discretionary funding
• 100 percent invested insponsor’s stock
• In-service withdrawals• 2 years after contribution
is made
• 5 years of planparticipation
Tax-Advantaged Plan Attributes
• Employer deduction at time of contribution
• Income is not taxed at the trust level
• Employees pay tax on distributions
• Distributions can generally be rolled into othertax- deferred vehicles
Additional Tax Advantages forQualified Plans
• Investment in life insurance (not in IRAs!)
– Qualified plans allow a portion to be invested in lifeinsurance
– Death benefits paid from the proceeds are excludiblefrom income to the extent of the pure insuranceamount paid.
General Requirements—All Tax Advantaged Plans
• Broad participation by rank and file
• Vesting
• Employee communications
• Nondiscrimination
• Prefunded
• Plan document
Realm of Possibilities
• Payroll Deduction IRAs
• SEPs
• Profit Sharing Plans
• SIMPLEs
• 401(k) Plans
• Defined Benefit Pension Plans
• Why?
– Retention
– Tax Shelter
– Adequate Retirement Savings
– Incentivize Productivity
– Simplicity of Administration
– Maximize Savings
– Provide Avenue for Savings
But first…
