More and more businesses are setting up a variety of retirement plans both to shelter income from taxes, and to further the retirement goals of both owners and their employees. These retirement plans can take many forms, such as SIMPLE IRAs, SEP IRAs, profit sharing plans, and 401(k)s.
The various plans each have their own pros and cons. Choosing a plan often depends on the answer to two main questions: How much income do you want to be able to defer? How much expense and complexity are you willing to incur?
Annual contribution limits are changed each year. 2014 amounts are listed below:
|Type||Employee Contribution||Employer Contribution||Vesting|
|401(k) Plan||$17,500 ($23,000 if over 50)||Lesser of $52,000 or 25% of compensation||Gradual|
|Payroll Deducted IRA||$5,500 ($6,500 if over 50)||n/a||Immediate|
|Profit Sharing Plan||n/a||Lesser of $52,000 or 25% of compensation||Gradual|
|SEP IRA||n/a||Lesser of $52,000 or 25% of compensation||Immediate|
|SIMPLE IRA||$12,000 ($14,500 if over 50)||2% of compensation to everyone or up to 3% of compensation matching||Immediate|
401(k)s allow the most income to be deferred, but also involve the most regulations and paperwork. Payroll deducted IRAs, on the other hand, have no employer costs, but also defer the least income. We can help you weigh the variables to make the best decision to meet your needs.
Other things to consider:
- Some plans require employer contributions even if employees do not contribute themselves.
- 401(k) plans can allow Roth contributions. Employees pay tax on money now and as long as it is a qualified distribution, they pay no taxes on earnings.
- Payroll deducted IRAs can be traditional or Roth. Employees may be allowed a deduction on their personal tax return for traditional IRAs.
- IRA plans require no annual filings with the IRS. Someone should review the employee and employer contributions to make sure they are in accordance with the plan document and IRS regulations.
- SIMPE IRAs must have employer contributions each year.
- 401(k), profit sharing plans and SEP IRAs have discretionary employer contributions.
- SEP IRAs need a qualified individual to calculate the employer contribution.
- 401(k) and profit sharing plans can have employer matching or profit sharing contributions.
- 401(k) plans can have an employer safe harbor contribution to help small employers pass the annual discrimination testing.
The administration of these plans can be difficult and time-consuming, so more and more businesses are outsourcing this function to third party administrators. As the third party administrator for your plan, we would provide summary annual reports for all participants and prepare the necessary tax forms each year. In addition, twice a year we will perform testing of the plan to avoid penalties or disqualification. We help with:
- filling out plan documents
- determining eligible employees
- calculating employer contributions
- preparing necessary notices
- assisting with distribution paperwork
Finally, we are available for consultation throughout the year whenever you have questions, and will advise you if federal legislation requires your plan to be amended. Other services we can provide, if needed, include education of employees as to investment choices and preparation of plan financial statements.
If you have been thinking of hiring a third party administrator, or are unhappy with the one you are using now, please consider LG&H. As a local business, we are always available to answer your questions. For existing clients, we also have the advantage of knowing about the rest of your business from doing other work for you.
- Semiannual testing to ensure compliance with regulations
- Annual accounting to participants and the IRS
- Available for consultation at any time