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Retirement Rest - Tustin, CA



Employers: Please email us if you would like more information on our Retirement Plan Services 

Do you own a business and want to provide a retirement plan for your employees? You've come to the right place. 

Retirement plans provide a tax-advantaged way to grow wealth for retirement. A well-designed retirement plan can help attract and retain talented employees and give you the employer the satisfaction of knowing you've helped your employees -- as well as themselves -- toward their retirement. 

There's a host of different plans available for businesses, and each comes with its own set of rules. Some are easy to implement; others are more complicated. Some are qualified plans and others are nonqualified plans. Qualified plans meet certain government requirements and offer tax benefits to both the employer and employee. Conversely, nonqualified plans are not eligible for tax-deferral benefits, and they're generally geared to the top brass. 

We focus on qualified plans, of which there are two basic kinds -- defined benefit plans and defined contribution plans. 

Traditional 401(k) plans 

A traditional 401(k) plan doesn't fall under the safe-harbor provisions for annual nondiscriminatory testing. That means this plan is subject to annual testing that ensures the contributions made on behalf of rank-and-file workers is proportional to those made on behalf of owners, managers or highly compensated employees.  The plan can be written to allow plan loans so employees can borrow against their plan balances. 

Safe harbor 401(k) 

The employer, by meeting the contribution standards of a safe-harbor 401(k) plan, doesn't have to worry aboutannual nondiscrimination testing for employer contributions. That's largely because employer contributions are mandatory in a safe-harbor 401(k) plan. The employer can make either matching or nonelective contributions under a safe-harbor plan. 

In the former scenario, the employer can match each eligible employee's contribution, dollar for dollar, up to 3 percent of the employee's compensation, and 50 cents on the dollar for the employee's contribution that exceeds 3 percent (up to 5 percent maximum) of the employee's compensation. The alternative is for the employer to make a nonelective contribution equal to 3 percent of compensation to each eligible employee's account. 

The employer has to make either the matching contributions or the nonelective contributions every year. The safe- harbor 401(k) plan document will specify which type of contribution will be made, and the employee has to receive this information before the beginning of each year. This plan can allow additional catch-up contributions in the amount of $6,000 (in 2015) for employees ages 50 and over. 

Automatic enrollment 401(k) 

What's different about this plan is that it automatically enrolls eligible employees in the plan. The employee is permitted to change the amount of his or her contribution or can opt out of contributing to the plan altogether. But unless the employee elects to opt out, he or she will be automatically enrolled. 

Like the safe-harbor 401(k) plan, this plan is exempt from the annual nondiscrimination test. The initial automatic employee contribution must be at least 3 percent of compensation. Contributions may have to be automatically increased so that, by the fifth year, the automatic employee contribution is at least 6 percent of compensation. The automatic employee contributions cannot exceed 10 percent of compensation in any year.

Profit-sharing plans 

A profit-sharing plan allows the employer to decide, within limits, from year to year whether to contribute on behalf of participants. Employers of any size can implement a profit-sharing plan. 

In a year when the employer does make a contribution, there needs to be a set formula for determining how the contributions are divided. This money is accounted for separately for each employee. Employer contributions to the plan can be subject to a vesting schedule that requires a set time period to elapse before employees can own them. Once vested, the employer contributions can't be forfeited. 

There's an annual testing requirement to ensure benefits for rank-and-file employees are proportional to benefits for the owners and managers of the firm. 

In establishing a profit-sharing plan for the company, the employer has some flexibility in choosing some of the plan's features -- such as when and which employees can participate in the plan. Other plan features are required by law, such as how contributions are deposited in the plan. 

Unless it includes a 401(k) cash or deferred feature, a profit-sharing plan usually does not allow employees to contribute. 

Considerations for defined contribution plans 

As already noted, much more common these days are defined contribution plans such as 401(k) plans that don't promise a specific pension-type benefit. They have become more popular options for small businesses and their employees. 

Some defined contribution plans are subject to annual testing to ensure the amount of contributions made on behalf of the rank-and-file employees is proportional to contributions made on behalf of owners and managers or highly compensated employees. These plans are also required to file an annual report with the federal government showing details about the plan and its operation. But other qualified plans don't require annual testing. 

Below are some variables to consider when deciding among various plans. 

  • Are employer contributions optional or required? 
  • Are employee contributions allowed?  Are plan documents required? 
  • Are annual returns required?  Is annual nondiscrimination testing required?  
  • Are catch-up contributions available to age 50-plus participants? 
  • Are plan loans allowed?  
  • Does the plan sponsor, or employer, have fiduciary responsibility to put the employees' interests above its own? 
  • Does the plan require a third-party administrator because of its complexity? 

Defined benefit (pension) plans 

Somewhat of a dying breed in plans for large firms, a defined benefit plan could be just the ticket for a small business. Large Corporations has largely moved away from pension plans and toward the defined contribution plans, such as 401(k)s, because employers make no guarantees about benefits available to 401(k) plan participants at retirement. Investment risk for 401(k) plans falls on plan participants rather than the employer.

With a defined benefit plan, however, the plan participant's annual retirement benefit is determined by the plan's benefit formula, generally based on tenure and pay. The maximum annual benefit allowed at retirement is the lesser of $210,000 (in 2015) or 100 percent of final average pay. 

Of the different types of retirement plans, defined benefit plans are the most complex to set up and operate. These plans can delay vesting of benefits, meaning employees must work for a minimum time period before they're entitled to benefits. These plans can also exclude some employees from plan participation. An Offset Plan combined with a 401(k) allows in certain instances a great combination. An actuary has to certify annually the amount the employer must contribute to the plan. The plan has to file an annual return and meet annual nondiscrimination testing standards among eligible plan participants. 

Solo 401(k): Only for the self-employed 

Officially called "one-participant 401(k) plans" the solo 401(k) is a traditional 401(k) plan covering a business owner who has no employees, or the business owner and his or her spouse. In general, these plans have the same rules and requirements as any other 401(k) plan. 

The business owner wears two hats in a solo 401(k) plan: employee and employer. Contributions can be made to the plan in both capacities. The owner can contribute elective deferrals of up to 100 percent of compensation up to the annual contribution limit of $18,000 in 2015. And the owner must make employer nonelective contributions of up to 25 percent of compensation (as defined by the plan) or up to the contribution limit for self-employed individuals. 

Overall contributions to a participant's account, not including any age-based catch-up contributions, cannot exceed $53,000 for 2015.