![[object Object],Justin J. Spraker Financial Advisor 9/12/2009 Financial planning services and investments offered through Ameriprise Financial Services, Inc. Member FINRA and SIPC. © 2006 - 2009 Ameriprise Financial, Inc. All rights reserved.](https://image.slidesharecdn.com/businessplancpapresentation-1252784510288-phpapp02/85/Business-Plan-Cpa-Presentation-1-320.jpg)
![Lack of plan sponsorship ,[object Object],[object Object],[object Object],[object Object],[object Object],1 “Ten Reasons to Love Small Business,” February 9, 2006, press release, Office of Advocacy, U.S. Small Business Administration 2 “National Compensation Survey: Employee Benefits in Private Industry in the United States,” U.S. Department of Labor, U.S. Bureau of Labor Statistics, March 2007.](data:image/gif;base64,R0lGODlhAQABAIAAAAAAAP///yH5BAEAAAAALAAAAAABAAEAAAIBRAA7)
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- 7. Advantages of IRA-based plans Generally, longer eligibility requirements (SEPs) No fiduciary liability for investments Lower administrative costs No ERISA bonding requirements No special government reporting Portability & accessibility
- 10. Structure of SEP IRA plan Employer’s SEP Plan Employee’s SEP IRA Employee’s SEP IRA Employer’s SEP IRA $$ $$ $$ Employer’s SEP Plan
- 15. Structure of SIMPLE IRA plan Employee’s SIMPLE IRA Employee’s SIMPLE IRA Employer’s SIMPLE IRA Employer’s SIMPLE Plan Employees’ salary deferrals Employer’s match or non-elective contribution $ $ $ $ $ $
- 30. next steps
- 31. Let’s get started. Financial planning services and investments offered through Ameriprise Financial Services, Inc. Member FINRA and SIPC. © 1998-2009 Ameriprise Financial, Inc. All rights reserved. Justin J. Spraker, Financial Advisor Ameriprise Financial Advisors 5 Southside Drive Ste 202 Clifton Park, NY 12065 (518) 669-3440 [email_address]
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- Thank you for joining me today to learn about the new appeal of small business retirement plans. My name is [name] and today I will be sharing with you some insights into how small business owners can help themselves and their employees better prepare for retirement. My goal is for all of you to take away some nuggets of information that will help you work better with your small business clients. Transition: Let’s start today by taking a look at some small business statistics.
- Small businesses are an integral part of the success of the country. Here are some interesting and eye-opening statistics from the U.S. Small Business Administration that demonstrate the value of small businesses to the U.S. economy and how they impact a large portion of the U.S. population. Small business represent 99% of the employers in the U.S., and they employ HALF of the population in the private sector. Since most of you own a small business or are employed by a small business, you are probably not surprised with these statistics. Unfortunately, small businesses have not been as successful providing opportunities for their employees to save for retirement. Fewer than half, 44%, of small businesses offer a retirement plan for their employees. For many employees, a primary driver for saving is the ability to save through a plan sponsored by an employer. According to the Investment Company Institute ( Retirement Saving in Wake of Financial Market Volatility, December 2008), among households that have a defined contribution plan, 88% say that payroll deduction makes it easier to save. And 43% agree with the statement, “I probably wouldn’t save for retirement if I didn’t have a retirement plan at work.” But, the majority of employees working for small businesses don’t have this opportunity. There is a real need for employers to provide an opportunity for their workers to save and that is what we are going to talk about today. We’ll also talk about how retirement plan sponsorship benefits the business, the owner and the employees.
- There are some real benefits to both the employer and the employees when a plan is in place. For the employer: Contributions made to the plan are generally tax deductible. (The IRS imposes limits on the deductibility of employer contributions based on total compensation.) In addition, tax credits may be available for administrative and retirement education expenses for startup plans. And plan administration costs may be tax-deductible. A retirement plan helps to recruit and retain employees. A retirement plan often ranks high on the list of benefits that job seekers are looking for. Offering a retirement plan can serve as a competitive advantage when competing with other employers for employee talent. A retirement plan also allows the owner to save for their own retirement. Many owners believe that their business is their retirement. By setting up a retirement plan, they have the opportunity to save for retirement outside the business, which helps to diversify their assets. For employees, an employer-sponsored retirement plan is an easy way to save for retirement. A retirement plan also helps improve morale by letting employees know that the owner cares about their future retirement security. Today, I’m going to cover the plan types that have been specifically designed for small businesses.
- First, I want to help you understand the different IRA-based plans that are available. Secondly, we’ll take a look at 401(k)s and the advantages and disadvantages of this type of plan. And finally, we’ll identify some key considerations when choosing a plan.
- There are two types of IRA-based plans specifically designed for the small business owner. These two plan types are called SEP and SIMPLE IRA plans. SEP stands for Simplified Employee Pension while SIMPLE stands for Savings Incentive Match Plan for Employees. The key objectives for both of these plan types is simplification for the small business owner. The basic principle of these plans is that employer contributions are deposited into IRAs registered in the participant’s name. This gives each participant the ability to control his or her own IRA and relieves the employer of many of the fiduciary responsibilities found in other plans. (Fiduciary responsibility includes the responsibility for either investing the assets for your employees or making sure they have an adequate choice of investments to choose from.) With a SEP or SIMPLE IRA, once the funds go into the participant’s IRA, that participant has complete control over those funds. Since these are IRAs, for the most part, the same portability rules apply as if we were talking about a traditional IRA. That means that each participant can choose where to establish their IRA. The SIMPLE IRA, which we will talk about later, has a couple unique rules that apply. TRANSITION: Let’s look at some of the advantages of an IRA-based plan.
- [See slide] There are several advantages to using an IRA-based plan. Starting with lower administrative costs — since each participant manages their assets through their own IRA, the employer has less record-keeping costs to maintain the plan. Portability and accessibility — Employees have the ability to move their assets to the investment provider that they choose and since this is an IRA account, they can access the assets at any time, subject to any early withdrawal penalties that apply to IRAs. Other plans, such as 401(k) plans and profit-sharing plans, require bonding. IRA based plans do not require this. No special government reporting — other plan types require annual reporting to the IRS. With SEP and SIMPLEs, there is no required reporting. SEPs generally offer longer eligibility requirements before employees are able to participate in the plan. This is important if the employer has seasonal workers or high turnover and wants to reward longer-term employees. Lastly, if the employer allows each employee the option to invest as each sees fit, the business’s fiduciary responsibility is reduced.
- Let’s start off by talking about the SEP. Some of the key features of a SEP plan include: Flexible employer contributions permit an employer to adjust contributions to match business results. Each year, the employer can decide how much they want to contribute to the plan. The contribution limit for 2009 is 25 percent of compensation up to $49,000. For business owners looking to save on taxes and save significant dollars, $49,000 can be pretty attractive. Employers can deduct up to 25 percent of eligible compensation for contributions made to the SEP on behalf of their employees. The ability to take a business tax deduction can be appealing to many business owners. Typically, the amount contributed must be equal among all employees. For instance, if the employer contributes 10 percent of compensation to their SEP IRA, then they must give every eligible participant 10 percent. However, with Social Security integration, it’s possible to contribute a higher percentage on income earned over the Social Security wage base, which is $106,800 for 2009, thus giving higher-paid employees a larger contribution. This is an additional benefit your clients may want to consider. If you are not familiar with this concept, refer to IRS publication 560 — Retirement Plans for Small Business for more details. To take advantage of Social Security integration, you cannot use the IRS model agreement. You must use a prototype plan document. Ameriprise Financial’s prototype plan document specifically allows for integration with Social Security. Another feature of the SEP is that it can be established up until the time the business files its tax return including extensions. This can be advantageous for businesses looking for last-minute tax deductions. Lastly, no government reporting means lower costs to the employer, but it also means high-end features like loans and vesting are not available. These features tend to add complexity to the plan — something small business owners typically are trying to avoid.
- The SEP offers flexibility when determining who will be eligible to receive a contribution. The maximum requirements are as follows: Must be at least 21 years of age. Must have been employed at least three of the immediately preceding five years. Must have compensation of at least $550 for the year 2009. An employer can establish less restrictive eligibility requirements but they cannot be more restrictive. For example, they could allow employees to participate after one year of service or they could eliminate the age requirement. Employees covered under a collective bargaining agreement may be excluded from the SEP IRA plan. As you can see, the SEP works well for employers that have a high level of employee turnover. By implementing a three-year service requirement, an employee would need to work three years before they are eligible for a contribution. The flip side to this is that once an employee has met the eligibility requirements for a given year, they’re eligible for any contributions that are made to the plan for that year.
- Here is an illustration of how a SEP plan is structured. First, an employer establishes a SEP plan. Each participant (eligible employee) in the plan, including the employer, must establish a separate SEP IRA to receive the contributions being made by the employer. As you can see, when the dollars are contributed, they are put into the individual participant’s SEP IRA account. Not only can these accounts accept employer SEP contributions but the individual can also make their traditional IRA contributions to the same account.
- Now that you know more about the SEP, let’s talk about the SIMPLE IRA. You can think of the SIMPLE IRA as a “401(k)-like” plan for small employers. The SIMPLE IRA was introduced in 1998 as an alternative 401(k) solution for small business owners. Like a 401(k), the SIMPLE IRA allows the employee to make contributions by having money taken out of their paycheck, on a pre-tax basis, and deposited to their SIMPLE IRA account. Also, like a 401(k), the employer can choose to either match employee contributions up to certain prescribed limits, or simply make an across-the-board nonelective contribution. Employees appreciate the ability to make salary deferral contributions, as it gives them the ability to save more toward their long-term retirement goals. The SIMPLE IRA is easier and cheaper to administer than a 401(k) plan. No non-discrimination testing — much of the cost in running a 401(k) is incurred in administering the plan and doing things such as non-discrimination and top-heavy testing. These are complicated calculations that specific 401(k) professionals are hired to do. Limited fiduciary liability for investments. Since these are IRA-based plans, the business is not liable for the investment of the assets. Each participant manages their own assets. The deadline to establish a SIMPLE IRA is October 1. So if you want to have a SIMPLE IRA plan for 2009, the deadline is October 1, 2009. This is very different from the SEP which can be established up until the tax-filing deadline of the business. One more thing to know about SIMPLE IRAs is that it must be the only plan a business contributes to during a calendar year. For instance, if a business that currently has a 401(k) in place and wants to switch to a SIMPLE IRA they would need to wait until January 1 of the next year before starting the SIMPLE IRA. This is important to keep in mind if you are replacing an existing plan with a SIMPLE IRA plan.
- Let’s take a look at how much employees are able to contribute to their SIMPLE IRA. In 2009, participants are able to defer up to $11,500 through pre-tax salary deferral. The pre-tax salary deferrals reduce current taxable income, which reduces the amount of income tax withheld from the employee’s paycheck. The employee can change how much they want to contribute from year to year. For employees age 50 and older, there is also a catch-up contribution provision that allows them to save more on a pre-tax basis. This provision was added to help people close to retirement save more.
- For lower-income individuals, there is a saver’s credit which reimburses the individual for a portion of the contributions made to a retirement plan. This is a topic that individuals should discuss with their tax advisor but typically it is available for joint filers with an adjusted gross income (AGI) of less than $55,500 and single filers with an adjusted gross income (AGI) of less than $27,750 (2009 limits). Unlike the SEP IRA, individuals cannot make traditional IRA contributions to a SIMPLE IRA. Another unique characteristic of the SIMPLE IRA is that the early withdrawal penalty is increased from 10 percent to 25 percent on distributions taken within two years of beginning participation.
- As I mentioned earlier, an advantage of the SIMPLE IRA is that employer contributions are flexible. Employers can decide each year to contribute in one of two ways: The first is a matching contribution in which the employer matches 100 percent of the first 3 percent of compensation that the employee defers to their account. For example, if an employee earns $20,000 a year, the most the employer would need to match is $600, which is 3 pecent of $20,000. If the employee elects not to defer to the plan, the employer is not obligated to make a contribution. Employers also have the option of offering a lower match (down to 1 percent) in two out of five years if business revenues fluctuate — providing the employer with some level of flexibility in matching contributions. The second alternative for employers is to make a 2 percent contribution to all eligible employees. This contribution is made whether employees defer or not. Employers might choose this option if they want all eligible employees to have some dollars set aside for retirement whether the employees choose to save through the SIMPLE IRA or not.
- Here is an illustration of how a SIMPLE IRA plan is structured. As you can see, it is very similar to the SEP except there are two sources of contributions. The SIMPLE plan begins when the employer establishes a SIMPLE Plan. Each plan participant (eligible employee), including the employer, must establish a separate SIMPLE IRA to receive the employee’s salary deferrals, and the matching or non-elective contributions made by the employer.
- Now that you understand the differences between a SEP and a SIMPLE let’s take a look at an example. In this example, we will look at Andrew, the owner of a small shop. Andrew has decided to sponsor a SIMPLE IRA plan for his company. Andrew earns $50,000 a year and his three employees each earn $20,000/year. Assume in this example that Andrew elects to defer $7,000, or 14 percent of his income, and his employees each elect to defer $2,400, or 4 percent of their income, into their SIMPLE IRA. Also assume that Andrew has elected a 100 percent match up to 3 percent of compensation. In this example each employee gets a matching contribution of $600 (3 percent of $20,000) and Andrew gets $1,500 (3 percent of $50,000). Andrew ends up with a total contribution of $8,500, or 17 percent of his income. The employees end up with a 7 percent contribution. The cost to Andrew for making contributions to the plan on behalf of his three employees is $1,800.
- With a SEP, Andrew could still get a 17 percent contribution for himself but he would also need to contribute 17 percent to each of his employees. This means a total SEP IRA employer contribution of $10,200 for the three employees ($3,400 each).
- In the example we just went through, the SEP would cost Andrew an additional $8,400 in contributions to his employees without the benefit of any increase in contributions to his own account. Assuming that 17 percent of compensation is meeting the retirement savings goal of Andrew, the SIMPLE appears to be a more cost-effective plan for Andrew. This example provides one explanation for the growth in popularity of the SIMPLE IRA since it was introduced in 1998. But what if Andrew’s goal was to get a higher tax deduction and he also wanted to reward his employees for their hard work? Or maybe the three employees are all family members and he knows none of them would be willing to defer their income into a SIMPLE IRA. Under these circumstances, a SEP might be a better alternative to meet his goals. Andrew could contribute more to each of his employees’ accounts while at the same time increase his tax deduction. Each business is different and every business owner has different goals they are trying to meet. All of the varying circumstances of each situation should be taken into consideration when evaluating the retirement plan options for the small business owner.
- Once a plan is established, the employer and each of their employees will need to set up IRAs. When establishing an IRA, whether it be a traditional IRA, a SEP IRA or a SIMPLE IRA, it is important to understand the IRA custodial agreement or trust agreement (if you are working with a bank). Each IRA provider creates their own custodial or trust agreement. Often the services the IRA provider provides, as outlined in their custodial agreement, may be more limited than what the IRS allows. This can mean less than desirable outcomes for your clients. [ADVISOR: You may refer to the IRA Custodial Checklist #24271.] Some key practices to consider are how the custodian impacts your client’s ability to name beneficiaries and what options their beneficiaries will have in taking distribution of the assets. You want your clients using a custodian that allows them to pass their assets to their beneficiary and they in turn are allowed to pass them to their heirs. Some IRA custodians don’t allow assets to remain in the plan. Instead, they immediately pay the assets to the beneficiary which means your beneficiary is being faced with a large tax bill and loss of future tax-deferred growth. This is important to understand particularly if you are referring business to a financial advisor. By using this handout, clients are able to compare their current custodial provisions against what an Ameriprise Financial Services, Inc. IRA has to offer. I [or the Ameriprise financial advisor] would be more than happy to meet with you and your clients to discuss their current custodial relationship. No matter where your clients have their IRA accounts, be sure they always name a beneficiary so they are able to take advantage of the tax-deferred growth the IRA offers. This of course is assuming the custodial agreement does not limit the beneficiary’s ability to retain the IRA account. Lastly, be sure to remind your clients to review their beneficiary designations periodically. Too many people name a beneficiary and then forget about it. As circumstances change they may need to change their beneficiaries to be sure their assets go to the individuals they want them to go to.
- The last plan type I want to cover is the 401(k).
- The 401(k) plan is an employer-sponsored plan. The plan establishes a trust which holds the assets of the plan on behalf of the plan participants. The plan sponsor (or other fiduciary for the plan) selects the investment options that will be made available to plan participants. This potentially increases the employer’s fiduciary liability with respect to the selection of investment options available under the plan. Participants can then choose where to invest their plan assets from the various options available under the plan. Participants in a 401(k) plan typically have less investment choices than they would have under a SEP or SIMPLE IRA. 401(k) plans are also subject to required annual reporting to the IRS.
- There are certainly some advantages to the 401(k) Both employees and the employer are able to make contributions. Employees can contribute up to $16,500 compared to $11,500 in a SIMPLE IRA. The profit-sharing contribution component, which is completely discretionary, can range between 0 percent and 25 percent of eligible compensation annually. The aggregate contribution limit between the profit-sharing and elective deferral cannot exceed $49,000 or 100 percent of compensation. For those age 50 or older, the 401(k) offers catch-up contributions. The catch-up contribution limit for 2009 is $5,500, compared to $2,500 in a SIMPLE IRA plan. Another feature of a 401(k) is the ability to take loans from the vested portion of the participant’s account balance, which the participant pays back through payroll deductions. Vesting is also available. Non-vested amounts that are forfeited can be reallocated to plan participants, used to reduce employer contributions or pay plan expenses. Vesting does, however, add to the complexity of the plan’s operation. If a plan allows for it, plan participants may designate some or all of their 401(k) deferrals as Roth 401(k) deferrals. These deferrals are made after tax and future qualifying distributions are tax-free. Adding additional features to the plan such as loans, vesting and/or Roth 401(k) contributions, while attractive to plan participants, adds to the complexity and cost of administrating the plan.
- Administration is a big part of operating a 401(k) plan. This includes the various non-discrimination tests, the tracking of vesting, monitoring of loans and various filing and reporting requirements (e.g., determination letter application, Summary Plan Descriptions, Form 5500, Summary Annual Reports, etc.). Also, the employer has a level of fiduciary responsibility relating to the investment options offered to their employees. Many 401(k) plans have a limited menu of funds for the participants to choose from. It is the employer’s responsibility to monitor the funds selected and the associated fees and performance, and to make sure the participants are receiving adequate information about their investment options. As mentioned earlier, the SEP can be set up to require three years of service before an employee is eligible. With a 401(k), the maximum years of service you can require is one year if the plan has implemented a vesting schedule for employer contributions, or two years if there is no vesting schedule for employer contributions. (Participants are always 100 percent vested in their salary deferral contributions to the plan.)
- I can’t talk to CPAs without talking about the individual 401(k) — sometimes called the Individual(k). Several years ago, the IRS revised the rules on deductible employer contributions, effectively increasing the amounts that a small business owner may be able to contribute to an individual 401(k) plan. Prior to this change, deferrals and employer deductible contributions were both counted toward the 25 percent employer deductible contribution limit. Now only employer contributions are counted toward this limit. This opened the door for small business owners to utilize a 401(k) to maximize contributions to their plan. As the employer, a business owner is able to make deductible contributions to the plan of up to 25 percent of their compensation. Additionally, as the employee, the business owner can also make an employee deferral of up to $16,500. The employee and employer amounts combined cannot exceed either $49,000, or 100 percent of their eligible compensation, whichever is less. Small business owners who have eligible compensation of less than $196,000 can contribute more by utilizing an individual 401(k) plan than they can under either a SEP or a SIMPLE IRA. If maximizing contributions is the goal of the small business owner and they make less than $196,000, they may want to consider the individual 401(k) plan. For those age 50 or older there is also a $5,500 catch-up contribution. In these cases the deferral limit is $22,000 and the combined limit is $54,500. Since an Individual(k) is an owner-only plan, nondiscrimination testing is not required. There is no annual 5500 reporting until the assets exceed $250,000. The Roth 401(k) is also available for the Individual 401(k). Designated contributions are made after-tax, and future qualifying distributions are tax-free. One primary disadvantage of the Individual(k) is if they do hire employees, they will then be required to perform nondiscrimination testing and have the other responsibilities of administrating a traditional 401(k) plan. However, other owners or partners in the business as well as spouses, if they are either employed by or have ownership in the business, may participate in the Individual(k).
- Let’s look at an example of a small business owner with compensation of $100,000. Under an Individual(k) plan they can make a deductible employer contribution of $25,000 (the limit on deductible contributions is 25 percent of compensation) plus defer another $16,500 for a total contribution of $41,500 for 2009. For the same year, the maximum this individual could contribute under a SEP is $25,000 and under a SIMPLE IRA the limit would be $14,500. For this individual, the Individual(k) plan makes sense if their goal is to maximize contributions. However, it is not for everyone. If the business owner isn’t able to save more than 25% of their eligible compensation, then they may want to consider a SEP instead, since the SEP allows for contributions up to 25 percent of compensation. Or if the sole proprietor is earning $196,000 or more in eligible compensation, they could contribute up to $49,000 (for 2009) to a SEP and not have to deal with the more complex administrative issues of a 401(k) plan. Keep in mind that a business owner with employees may still be able to have an Individual(k) if the employees can be excluded from the plan. Also, if their spouse is their employee, an Individual(k) is allowable and their spouse can also participate in the plan.
- There are a lot of factors to consider when helping your client select a plan or if you are trying to determine if you should discuss alternative plan options with your client. The “2009 Guide to Small Business Retirement Plans” brochure is an excellent tool to help in comparing the features of the different types of plans available. The brochure lays out the different plans side by side. [ADVISOR: If you are using the booklet “2009 Guide to Small Business Retirement Plans” (#K-24200), you may refer clients to the “Retirement Plans at a Glance” chart on pages 4-5 to see how the SEP, SIMPLE, Profit Sharing and 401(k) compare to one another.]
- As next steps to help you fully service your small business clients, I recommend the following: Review your current book of small business owners and determine: The need or desire for a retirement plan. For clients with existing plans, particularly money-purchase pension plans and 401(k)s, determine how recent tax law changes may have impacted them or if there are opportunities to reduce costs and simplify their employee retirement benefit offering. Is your client’s current plan meeting their needs? Set up a meeting to review.
- Ameriprise Financial offers: Plan selection assistance — we can help you and your client make an informed decision about which plan meets their needs. Comprehensive resources — which helps make setting up and maintaining the plan seamless and easy. These resources include: A plan comparison guide — to help the employer make an informed decision when selecting or reviewing their plan. Retirement plan implementation materials — which makes implementing a plan easy. Participant savings guides — to help employees understand how much they need to save for retirement. Enrollment presentations — to help the employees understand the plan and their investment options. Local financial advisor to provide personalized support – which gives your client and their employees a local contact to help them along the way.
- I’ve covered a lot of material [TODAY] [TONIGHT] and I hope I’ve gotten you thinking about why having a good retirement plan makes sense for just about everyone. I have time for three questions now. If you have something you’d like to ask me privately, please stay after the seminar. [WAIT FOR QUESTIONS.]