Employee Benefits and Retirement Planning

Opt In Or Opt Out

SBOCTeam — Tue, 08 Sep 2009 12:59:00 GMT

Find out whether an automatic enrollment 401(k) plan is right for you

By Max Berry

Saving for the future is every person's individual responsibility. But, as a small business owner, you have the power to provide your employees with some incentive. Instituting an automatic enrollment 401(k) plan may be as close as a you can come to guaranteeing that your employees will save. Automatic enrollment increases plan participation dramatically, but it also presents its own set of challenges for employee and employer alike. Read on to find out if automatic enrollment is right for your business.

The Case for Automatic Enrollment

The Pension Protection Act of 2006 requires employees to make a "negative election" or "opt out" of contributing to their employer's 401(k), otherwise payroll deferrals will be made automatically. The effects of the provision are clear: Given the choice to opt in or opt out of a retirement plan, a full third of workers opt out. Automatic enrollment plans cut that figure to less than ten percent.

Employers who stress the importance of saving, and make it easier for their employees to do so, will attract and retain workers who are more committed to the security of their futures and, naturally, their careers. Making enrollment automatic will also increase the number of lower-income workers who take part in the plan. This will help you pass the non-discrimination testing that comes along with many automatic enrollment plans. There are tax advantages as well. You may deduct your own contributions to your employees' funds and taxes on earnings are deferred until distribution.

Bear in mind that there is more than one type of automatic enrollment plan to choose from. The basic automatic enrollment plan, the eligible automatic enrollment plan, and the qualified automatic enrollment plan all vary slightly as to how funds are invested, how much, if at all, employers must contribute, and how accounts are vested. Ask your financial advisor for advice on which one is best for your business.

Going Automatic

If you are planning on instituting an automatic enrollment 401(k) for your business, consult with your bank, mutual fund, or insurance company first. Experts from your financial institution will help you develop a written summary of the plan's terms, set up a trust fund for assets, and create a recordkeeping system. If you already offer an elective 401(k), most of these things will already be in place. You will merely need to adapt the plan to encompass everyone and provide updated summaries of the plan's terms to your employees.

Set a regular percentage of employees' wages to be allocated to the 401(k), but make sure employees are aware that they may adjust how much they contribute. While automatic enrollment helps many employees-especially young ones who may have cause to worry about the future of social security-save for retirement, the median deferral rate for employers using the automatic enrollment system is only 3%, which may be below the rate many employees would choose on their own. Deferring a bit more of employees' salary-even 5% or 6%-could better prepare them for retirement.

You may also choose to contribute to employees' funds, either through matching contributions, a set percentage-of-compensation rate, or both. Under the basic and eligible contribution plans-though not qualified plans-employer contributions are optional. However, as a means of further encouraging participation, not to mention fostering goodwill with your employees, even a small employer contribution will go a long way.

Staying Within The Rules

Not long ago, fear of liability for losses on employees' investments discouraged some employers from instituting automatic enrollment plans. Recent changes in the law, however, relieve employers of that liability. When employees' contributions are used to make certain default investments-known formally as qualified default investment alternatives-that traditionally offer a high rate of return over the long term, the employer is not liable for any losses. Still, to avoid this concern altogether, and to promote a proactive attitude toward retirement saving, encourage your employees to research all the investments available through your plan and select those that most interest them.

And, perhaps most important of all, make sure everyone who is eligible for enrollment in your plan is, in fact, enrolled. According to the IRS, any employee age 21 or older who has worked at your company for 12 consecutive months, and has worked at least 1,000 hours over the course of those months, must be eligible to contribute to your firm's 401(k) plan. This includes employees who are not working for you full time. A thousand hours over twelve months breaks down to around 22 hours of work per week, which is why some employers hold their part-timers to 20 hours. IRS antidiscrimination rules also prevent retirement plans from favoring highly compensated employees over those who don't make as much. Setting up a "safe harbor" plan, where you make a 3%-of-income non-elective annual contribution to each employee's 401(k), will keep you well within the parameters of these antidiscrimination rules. For more information on 401(k) programs, visit 401khelpcenter.com or irs.gov/retirement/index.html.

The �10 Spot

SBOCTeam — Tue, 08 Sep 2009 12:57:00 GMT

What next year's tax law changes regarding IRAs mean for retirement

By Reed Richardson

Typically, the arrival of each new year brings with it a host of tax law changes, some small, some large, and some too arcane for all but the most savvy investors to benefit from. But 2010 brings with it such an important and relatively simple (but easily overlooked) tax law change-one that could potentially save you hundreds of thousands, if not millions, of dollars over the coming decades-that both individuals and small businesses should start planning for how to take full advantage of it right now.

This big change involves a financial transaction known as Roth IRA conversion. Simply put, this conversion amounts to taking an investor's traditional IRA, which is typically funded with pre-tax dollars but pays out taxable income upon retirement, and changing it to a Roth IRA, which uses current after-tax contributions to eventually pay out tax-free retirement benefits. For many, the attraction of shifting more of one's retirement funds from a standard IRA, which also has strict age and minimum disbursement rules, to an investment vehicle with no future tax liability or age-generated payout requirements, like a Roth IRA, is apparent. But up until now, the IRS had set strict limits upon when and how someone could be eligible to execute a Roth conversion.

"Why would you want to make such a swap? Because you think you or your heirs could end up with more money over the long haul by investing in a Roth instead of a regular IRA," explained New York Times money columnist Ron Lieber in July. Previously, households that had adjusted gross incomes of $100,000 or more were barred from such a swap, a rule that prevented many two-income, middle-class families from participating. But starting in 2010, that ceiling disappears permanently, meaning that anyone of any tax bracket that has a traditional IRA can now convert it to a Roth IRA-a process that simply involves catching up on all the unpaid taxes of contributions and investment returns. Even more enticing to those contemplating conversion: the new rule also includes a provision allowing investors to spread that catching up process over two tax years-2011 and 2012-rather than have to take the hit all in one year.

For younger small business owners who expect to be in a higher tax bracket during retirement than they are now, converting that rollover IRA from a previous job's 401(k) could prove to be quite lucrative. And the sooner you convert, the better. Even investors near to retirement could get a bigger bang for the their retirement buck if they're able to cover the cost through non-retirement investments that don't trigger high capital gains taxes. In that same column, however, the +Times+'s Lieber pointed out that some financial experts believe Roth IRAs are just too good to be true and that their tax-free payout status will one day be compromised. As a result, he warns against putting all of one's retirement eggs into the Roth basket. But to get a sense of the tradeoffs and to see if a Roth IRA conversion might best suit your particular circumstances, you can check out the handy one line calculator at http://www.money-zine.com/Calculators/Retirement-Calculators/Roth-vs.-Traditional-IRA-Funds-Calculator/.

Another important advantage of the newly relaxed conversion rules centers on Roth IRA participation. High-income earners-those household making over $160,000 a year-were and still are barred from making any kind of annual Roth IRA contributions. The new no-income limit rule on Roth conversions, however, gives all taxpayers an end-run around this Roth participation cap. Now, any taxpayer can fund a Roth IRA by following a two-step process: First, set up and fund a traditional IRA and then, when it makes sense, convert it to a Roth IRA. If you invest after-tax income to start up the regular IRA, your conversion costs will only involve paying back taxes on the IRA's investment returns, not your contributions. As a result of this loophole, both individuals and small business owners should consider ways they or their companies can establish traditional IRAs in this tax year, so they could then be converted into Roths once 2010 arrives.

All About SEPs

SBOCTeam — Tue, 08 Sep 2009 12:57:00 GMT

Simple to set up, easy to administer, Simplified Employee Pension Plans may be for you

By Max Berry

Among all the 401(k)s, 403(b)s, and various types of IRAs available to you and your employees, Simplified Employee Pension (SEP) plans don't get a whole lot of attention. This doesn't mean you shouldn't consider one for your firm. If you're a small business owner just starting to offer retirement packages to your employees-or one simply looking to expand the ways employees can save-a SEP may be just the thing for you.

The Basics and the Benefits

Simplified Employee Pension plans were created with small businesses in mind. A SEP works like a traditional IRA, but with fewer start up and operating costs than other retirement programs and with a minimum of fuss on your part. Under a SEP plan, employers contribute directly to SEP-IRAs on behalf of their employees, who do not contribute. In 2009, you may invest up to 25% of an employee's salary or $49,000, whichever is less. (The figures are modified each year to reflect cost of living adjustments.)

A retirement plan based entirely on employer contributions may not, on its surface, seem like the most appealing option for a small business owner trying to make ends meet. But there are many benefits to a SEP. In addition to the plan's low operating costs, contributions to a SEP are tax deductible. There are also very few documents to file with the government and, in most cases, your financial institution will take care of this for you. Offering an employer-funded plan is also an ingratiating gesture that will promote goodwill between you and your employees.

One of the key benefits of a SEP-and the reason such a plan is ideal for small or young businesses-is that you do not have to make the same size contribution each year. Managers may adjust the amount they contribute based upon how their business has performed in a given year. If times are particularly lean, you may defer contribution altogether.

Getting Started
They call them ‘simplified' for a reason: SEPs are incredibly easy to institute and manage. Simply contact a bank or other financial institution that offers a SEP plan and complete IRS form 5305-SEP. Some financial institutions offer customized plans that have been approved by the IRS. These require you to complete a different form, but the variance between plans should be small. Take great care in selecting a financial institution to manage your plan; whichever one you choose becomes a trustee in your employees' retirement funds.

Once the SEP is in place, your main responsibility is to forward all contributions to your financial institution by the due date of your tax return. Your trustee will then invest the funds as directed by each individual employee as well as provide participants with yearly balance and contribution summaries. The trustee should also distribute a clear, non-technical explanation of the terms of the plan to each employee. With so much of the day-to-day maintenance of the plan out of your hands, it is important to remember to monitor your trustee closely. Check in with employees to see that they are satisfied with the way the plan is being run.

Keeping Everyone Covered
Employees must be at least 21 and have worked for you in at least three of the past five years to be eligible for inclusion in a SEP. Note that the rule states in three of the past five years and not for three of the past five years; any employee who has worked for you for any amount of time-no matter how little-in three of the past five years is eligible. SEPs can be run in conjunction with other retirement plans, so you may still offer some form of retirement plan to those employees who don't yet meet the eligibility requirements. However, unless the other plan is also a SEP, you cannot use the standard Form 5305. You must instead adopt a prototype or individually designed SEP. It may be simpler for everyone if the employee invests independently until he or she becomes eligible for inclusion in the SEP.

If you do institute a SEP, all eligible employees must be included in the plan. This includes part time employees, seasonal employees, and employees who die or terminate employment during the year. Likewise, contributions must be uniform for each employee-not the same monetary amount, but the same percentage of each employee's salary.

SEP balances may be rolled over to another retirement account tax-free. If an employee younger than 59 withdraws money without rolling it over to another account, the money is subject to income tax plus an additional 10% tax. Employees over 59 do not have to pay this additional tax when they withdraw. As is customary, employees must begin taking a minimum distribution from their accounts once they turn 70.

If the time comes when a SEP is no longer the best option for your business, the plan is easy to terminate. Simply notify your financial institution that you will not be making a contribution for the next year and would like to discontinue the plan. It's as simple as that.

Helping 'Em Save

SBOCTeam — Mon, 30 Jun 2008 20:12:00 GMT

How new rules help biz owners control employees 401(k)s

By Chris Freeburn

Helping your employees save for retirement is not merely an altruistic gesture on your part. There are huge benefits for you as an employer, and for your business as a whole. In today's increasingly competitive marketplace, businesses small and large are competing for highly skilled employees-and the competition is only getting more intense. Today's highly talented job applicants are looking for more than a good salary. They are seeking the kind of perks that provide financial security for themselves and their families in the long run.

Employers have a variety of options to choose from when deciding what sort of retirement plan to offer. By far, the most popular type of plan-both among employers and employees-is the 401(k). According to the Internal Revenue Service, more than 44 million American workers currently participate in 401(k) plans with a total investment of over $2.5 trillion.

A 401(k) is a "defined contribution" plan, as elaborated by the Internal Revenue Code, meaning that an employee elects to have a specified portion of his or her pre-tax wages directly contributed to the plan. Employee contributions are usually invested in mutual funds. Some employers offer matching contributions to part of or all of an employee's 401(k) plan contributions. Offering a 401(k) retirement plan will attract a better pool of job applicants to your company and help keep them there for the long term. Recent changes in federal tax law has made setting up 401(k) retirement plans much easier for small businesses, and increased the amount of money employees can save.

A variety of options

There are three basic types of 401(k) plan that businesses can offer to their employees:

Traditional 401(k): The most flexible type of 401(k) plan allows businesses to decide whether to make contributions to the plan for all participating employees, match employee contributions, or do both. Contributions can be made through payroll deductions. Traditional 401(k)s offer employers an advantage. Employer contributions to an employee's account are not fully "vested" at the time they are made, however. That means that an employer can create a specified time frame called a vesting schedule-usually several months-before any matching contributions to the employee's account become non-forfeitable by the employee. This means that if an employee leaves the firm, any matching contributions to his account made during the vesting period before his departure can be reclaimed by the employer. The IRS also demands that traditional IRA's conform to complicated "discrimination" tests, which compare compensation rates among plan participants. For additional and complete information on 401(k) plans, please visit irs.gov.

Safe Harbor 401(k): Under this type of 401(k) plan employers can contribute either matching or non-elective amounts to the plan for eligible participants. These employer contributions remain tax deductible and employee contributions are tax deductible as well. Unlike a traditional 401(k), all employer contributions are fully vested when made. The primary benefit of "Safe Harbor 401(k) plans" is that they are not subject to the discrimination testing that applies to traditional 401(k) plans. Safe Harbor plans are usually chosen by small businesses with several highly compensated owners/employees whose contributions to the 401(k) plan would be significantly disproportionate to other, lower paid employees.

Simple 401(k) Plans: These plans allow small businesses to adopt the basic features of a traditional 401(k) plan without the non-discrimination testing. Simple 401(k) plans are available to companies with 100 or fewer employees who receive a minimum of $5,000 in annual compensation. Participants in a Simple 401(k) plan may not receive benefits from any other retirement plan offered by the employer. While Simple 401(k) plans avoid the costly testing required by traditional 401(k) plans, they are permitted significantly lower salary deferment limits-$5,000 less per year than traditional 401(k)s. All employer contributions are fully vested when made.

Setting up a 401(k) plan has become a relatively easy affair for qualifying small businesses. Many major financial institutions have created programs that walk a small business through the plan setup and administration process. Setup fees for these programs are often under $5,000.

Increased employer control

In 2007, the federal government approved new rules that gave employers increased control over their 401(k) plans. Under the new rules, it is easier for employers to automatically enroll employees into the 401(k) plan. Employees still have the right to "opt out" of the plans, but most don't. Employers may now also exercise greater control over the mix of investments in which automatically enrolled 401(k) participants have their money invested. Before the rules change, automatically enrolled participants' funds were only to be invested in vehicles like money markets, which were guaranteed not to lose money. Under the new rules, if automatically enrolled employees do not select investment vehicles for their funds on their own, the employer and plan administrator can choose to invest their money in a mix of stocks, mutual funds or fixed income investments as they see fit.