Background: Technically, there are eight different styles of retirement plans that could be established for small businesses. Each type has separate rules, regulations, and requirements. Based on the employer’s goals, they can have employer contributions as little as $0 or as high as over 25% of total payroll. We can often combine types of plans to get even higher employer contributions, if desired.
Understanding that each situation is different, SIMPLE IRAs can be an option for businesses with less than 100 employees. While they do not allow for as high of a contribution as other plan types, there is no government reporting. Administratively, for the employee, employer, and advisor, they have always presented a few challenges.
Our Case: We have worked with an individual business owner under our PathWise Financial Planning for years. The business did not have a retirement plan. As this business continued to grow, the owner’s only option for tax-deductible retirement contributions was in their Traditional IRA. This allowed for a maximum contribution of only $7,000 per year.
As we evaluated a 401(k), it became clear that the plan would likely not pass all the 401(k) testing rules. With recent business growth, the owner was not ready to commit to company contributions that would allow them to bypass some of these rules. We considered a SIMPLE IRA, but the hassle of various accounts and multiple checks to be written by the employer to the different investment companies, made this less appealing.
We found a newer program that combines the appealing aspects of a SIMPLE IRA as far as the rules and regulations with the easier deposit and administration of a 401(k). It is the first of its kind where there is one employer contract, and each employee can enroll separately on-line. It allows for one electronic deposit of both employee and employer contributions. This new program literally made the SIMPLE IRA simpler!
The Results: We used this program to meet the employer’s objective of providing an employee benefit and allowing them additional tax deferrals of income. Not only did this assist in employee retention and recruiting, but it also allowed an additional $20,000 in retirement deposits for the business owner. The business owner was able to save about $7,000 in income taxes with their higher deferral and the company deductible match.
Bottom Line: As advisors, it is important we stay current on more than just the tax rules and government regulations. We need to also keep informed about service providers, their programs, and any enhancements. By staying informed, we can quickly see when a previously, less desirable solution shifts into a better strategy to assist our small business owners in meeting their overall goals.
This is a hypothetical example for illustrative purposes only. The experience of this client may not be representative of the experience of all clients and is not indicative of future results. Any tax advice contained herein is of a general nature and is not intended for public dissemination. Further, you should seek specific tax advice from your tax professional before pursuing any idea contemplated herein. This advice is being provided solely as an incidental service to our business as financial planner. Securities offered through Valmark Securities, Inc. Member FINRA, SIPC. Financial Planning and Investment Advisory Services offered through B & E Investment Advisers, Inc., a State Registered Investment Adviser, Business & Estate Advisers, Inc., B &E Investment Advisers, Inc. and B&E Pension Advisers, Inc are separate entities from Valmark Securities. (1) Names have been changed to protect the identity of the client.