Determining if you have highly compensated employees (HCEs) isn't hard. The Internal Revenue Service (IRS) is clear on who qualifies as an HCE. An HCE is an individual who:
Retirement Services & Financial Advisors - Serving Columbus & Beyond
You'd like to offer some type of retirement plan. You've looked at several options including a 401(k) plan. You just aren't sure which option to choose. Have you considered a payroll deduction IRA or a Simple IRA?
Small business owners may think that a 401(k) retirement plan is too complex to implement and too costly to maintain. But offering a retirement plan is crucial to attracting and retaining employees. Nearly 51% of employees joined their current company because of the retirement plan. Before you decide whether or not to offer a 401(k) consider these three steps to setting up a 401(k) for your small business.
Most business startups are focused on selling their products or services. That's understandable. If you're not selling, you're not generating revenue, and without reliable cash flow, your company struggles to survive. But not too long after launching a business, you're looking at hiring your first employees. You want to make sure you get the right employees from the beginning. Employee turnover is a costly proposition, especially for a fledgling business. It is estimated that it costs 2.5 times a person's salary to replace a lost employee. That's as much as $75,000 for an employee making $30,000 per year.
So what changed?
New regulations set last year by the Treasury Department have left many struggling to meet the requirements for the 20% pass-through income deduction. Some were still able to take advantage by splitting firms or practices, for example, but these new regulations have put a stop to many “workarounds.”
High-earning service professionals are working to find ways to reduce their income limits to below $315,000 if they are married, or $157,000 if single to take advantage.
So what if you don’t qualify?
A cash balance plan can help those who don’t meet the qualifications set for the 20% pass-through income deductions lower their average gross income. In fact, up to $390,000 in deductions can be saved. A cash balance plan can actually help you reduce your taxable income AND your adjusted gross income.
Is a cash balance plan right for you?
There is a lot that goes into making sure that a retirement plan fits your needs whether you are are a doctor, lawyer, business owner etc. Significant tax savings can be left on the table if you don’t take the time to understand your options. At Life, Inc. Retirement Services, we specialize in these “custom” retirement plans. We understand it isn’t a one-size-fits-all solution, and we are committed to staying on top of the changes to ensure you can take advantage of every option available to you. Set up a free consultation with us today to figure out what will be best for you in the long-run.
We are in the thick of tax season and many are questioning if they were able to find enough tax savings. This is a great time to start considering your savings plan for the coming year. Chances are your employees are thinking the same, so this is the time to educate them on opportunities this year.
The IRS has announced an increase in contribution limits for certain plans and we are excited. Here is what you need to know (and some food for thought):
Defined Benefit Plans: We’ve seen a few limit increases between 2018 and 2019. The limit in 2018 increased to $220,000 and to $225,000 in 2019. This can be a great plan for high earners, especially if you are self-employed!
One of the challenges a small business owner faces is finding the right retirement plan. While some may feel a 401(k) is too cumbersome, there are reasons why a 401(k) is often the best option, even if your business is very small. However, before deciding on the right plan, it is crucial to carefully evaluate plans as well as the current, and future impact on your business.
Factors to Consider When Selecting a Plan
One of the first factors is the size of the company. A sole proprietor and a company with employees may require different types of retirement plans, although both may opt for a 401(k) plan. Here are some of the issues to be considered when considering a plan:
- Size of Business – while a sole proprietor may wish to consider a different plan, one reason to consider a 401(k) is to account for future growth. Having an existing 401(k) plan in place means you have a valuable recruiting tool when you start expanding your staff.
- Ease of Enrollment – thanks to lesser rules which apply to small businesses, a 401(k) plan can have provisions to automatically enroll new employees. This means less administrative burden on your company and less concern about compliance matters.
- Flexibility of Investments – one of the most important factors to be considered is the breadth of investment options. This is particularly true if you have employees in different age groups. A younger employee may be willing to take more significant risks with their 401(k) investments while an older employee may prefer a more stable investment. This is important to determine ahead of time, particularly since a company who has a lower retention problem will likely need a broad base of investment options.
- Administrative Burden – the last thing a small business owner needs is additional paperwork. When searching for a plan, it is important to determine ahead of time the amount of time you will be required to dedicate to dealing with plan paperwork. Having the right company working on your 401(k) plan will ensure the burden of administering the plan will be handled by the outside company.
- Fees Involved in Plan – a big factor in determining the suitability of a 401(k) plan for your small business is the fees for the plan. While the IRS allows most small businesses to deduct a portion of the fees for the initial setup, there are ongoing management fees which must be considered.
Working with the Right 401(k) Administrator
Once a business owner, or manager has an opportunity to carefully evaluate their options for a 401(k) plan, they must find the right administrator for the plan. This means thoroughly reviewing their qualifications, the level of service they are providing, and the quality of the plans offered.
In addition to offering customized solution to your plan needs, the right plan administrator should also be addressing the required paperwork. These filings are required under ERISA Title I and Title IV as well as the Internal Revenue Service (IRS).
Another factor when considering a small business 401(k) plan is the administrator's experience in dealing with small business plans. While many plan administrators are well-versed in dealing with plans for a large company, many do not have the experience to deal with small business 401(k) plans.
When you need a customized retirement plan solution for your business, consider the benefits of working with Life, Inc. Retirement Services. We bring a unique perspective because our focus is on small business needs. Your need a plan administrator who will work with you to customize a 401(k) plan that fits your needs and meets your company objectives. Contact us today at 614-396-7652 or by Email at firstname.lastname@example.org for a free consultation and let us help you design the right 401(k) plan for your business.
If you plan to offer a small business 401k to offer to your employees, they'll love you for it. According to a survey in 2015, Glassdor,found 31 percent of employees would like to have a retirement plan at work, and 79 percent want additional benefits, rather than more money. Previous online surveys have also reported that a number of workers would leave for one with a 401k, if their current job does not offer one. While adding a retirement plan might help you retain good current employees and attract new ones, because many companies do not offer a retirement benefit anymore, you don't want a cookie cutter or one-size-fits-all plan. Here's why and how a professional 401K company can help.
One of the best ways to make your employees happy and less likely to leave your company and take another job may be to offer a small business retirement plan. In fact, nearly half of American families have no retirement savings account, even though the average retirement savings of American families is $95,776. That number can be deceptive because the median amount of savings for families is just $5,000--hardly enough for a healthy retirement. That counts those with savings and those without. The median amount for those with savings is $60,000. It's no wonder many American employees surveyed have said they would leave their job that has no retirement plan if they had a chance take one with a good plan. Other reasons to offer a plan include the tax savings for business owners and retirement advantages for them.
Establishing a 401(k) plan for your small business is a great way to attract top talent and increase employee retention rates by helping your workers secure their financial future. Setting up a 401(k) also offers significant small business tax advantages. Yet as a small business owner, you might not know what these advantages are or how they can help your company save money.
Startup Tax Credit
When your business sets up a retirement plan for the first time and meets certain criteria, the federal government may offer your company a $500 tax credit for each of the first three years of the plan for a total credit of $1,500. This is known as the Credit for Small Employer Pension Plan Startup Costs and is designed to cover 50% of the plan's startup expenses, including administrative costs, employee education costs and more.
According to the IRS, your company may be eligible for the credit if:
- It had 100 or fewer employees who received at least $5,000 in compensation in the previous year.
- It had at least one plan participant who was not considered a highly compensated employee (owned more than 5% of the business or earned more than $120,000).
- In the last three years, no employees received benefits from another qualified retirement plan from your company.
Matching Contributions Deduction
A company 401(k) plan not only helps your employees save for their future. It also helps your business lower its tax obligations by letting you deduct the matching contributions that you make to your workers' retirement accounts.
In 2018, the maximum an employee can contribute to his retirement account is $18,500 (not including catch up contributions for people age 50 or better), while the maximum an employer can contribute to each worker's retirement account is $36,500 (the total "all sources" maximum contribution - employer and employee combined - is $55,000).
Imagine that you have 10 employees each making $40,000 annually and contribute 3% ($1,200) to each of their retirement accounts every year. That annual $12,000 ($1,200 x 10) is tax deductible. If it takes six years for employees to fully vest, that is $72,000 to the employees and the same in deductions for your business. So not only does your company 401(k) plan demonstrate your commitment to your workers. It lets you keep more money in your company's coffers.
Tax Savings vs Plan Costs
How much your company's 401(k) plan costs depends on a variety of factors, but if you choose the right retirement plan provider, the expenses can be kept to $1,000 or less. As a business owner, you can also participate in your company's plan. This means that on top of the tax savings your company receives for offering the plan and providing matching contributions, you also receive personal tax advantages by participating.
For example, if you are 38 years old, contribute $15,000 to your personal retirement account and are in the 24% tax bracket, then you could save approximately $3,600 on your tax return. This outweighs the cost of administering your company's 401(k) by three times or more.
Even with these obvious tax benefits, many small business owners do not offer a retirement plan. Some think that the administrative tasks would be too time consuming and burdensome. Others say that retirement plans are too expensive and only for large companies.
The truth is that when done right, establishing a company retirement plan is painless and relatively affordable, even for a small business. The key is to hire the right provider firm, one that has the experience, know-how and resources to smoothly set up and administer the plan. If you are ready to help your employees save for their retirement and simultaneously help your company lower its tax burden, then it is time to talk to a small business retirement plan provider to see what it can do for you.