The Bottom Line: The Art of Retirement Planning
There are many retirement plan alternatives available to shop owners.
Derek C. Hinrichs, Supervisor Accountant, Mueller Prost
Mold builders are faced with many planning strategies to help their companies reach their desired success, from the structure of the company to a detailed business model. Planning should not come to a halt when they are trying to determine and establish a retirement plan.
The questions many shop owners ask themselves are: What type of retirement plan should be adopted? Which plan best fits the company and its employees’ goals? How can mold builders use a retirement plan to compete in today’s competitive labor market? To answer these questions, a shop will first need to look at the available options. There are many alternatives to consider, which may cause great confusion at times. Should the company establish a qualified or non-qualified retirement plan? What are the differences in the plan structures? Who may participate?
A non-qualified retirement plan is a type of plan that falls outside of Employee Retirement Income Security Act (ERISA) guidelines. Non-qualified plans allow for the flexibility to meet specialized retirement needs for select employees, including key executives, but do not have the tax benefits that are available for qualified plans.
Qualified retirement plans, on the other hand, meet the Internal Revenue Code (IRC) requirements and the ERISA guidelines, and they offer several tax benefits for both the employer and employee. Some of the most common qualified retirement plans include a Savings Incentive Match Plan for Employees Individual Retirement Account (SIMPLE IRA), Simplified Employee Pension Individual Retirement Account (SEP IRA), 401(k) plans and defined-benefit plans. Each plan has its own unique set of characteristics and standards to follow. In choosing the right plan, mold builders need to understand their nuances and match them to the company goals.
The following is a brief overview of the various qualified retirement plans and how they may be applicable to mold builders.
SIMPLE IRA plans. Mold builders may establish a SIMPLE IRA if there are 100 or fewer employees and the company does not maintain another retirement plan. Employees eligible to participate include those who have earned at least $5,000 from the employer in any two prior tax years and can be reasonably expected to do so in the current year. This plan requires the company to make contributions to it, which can be accomplished one of two ways. The company can match the employees’ elective deferrals, dollar for dollar, up to 3 percent of compensation or can contribute 2 percent of compensation for each eligible employee, up to $265,000. An advantage to this type of plan is that it is fairly easy to set up and maintain, and it should require minimal costs.
SEP IRA plans. SEP IRAs, on the other hand, do not have an employee limit and can be established by most employers. Eligible employees include those who are at least 21 years of age, have worked for the company at least three of the last five years and have received at least $600 in compensation during the year. However, plans may be set up to have less restricting requirements to determine eligible employees. A SEP IRA plan does not require the company to make contributions. That is, contributions are elective from year to year. However, the company is the only contributor to this type of plan. It can contribute up to 25 percent of employee compensation, up to a maximum of $53,000 per employee in 2016. As with a SIMPLE IRA plan, a SEP IRA is fairly easy to set up and maintain, and shouldn’t require significant setup or annual maintenance fees.
IRC §401(k) plans. 401(k) plans can be established by almost any company. Eligible employees of the plan include those who are at least 21 years of age and have been employed at least one year, recording at least 1,000 hours of service. Typically, a 401(k) plan does not require the company to make contributions, but is a bit more comprehensive when it comes to contribution limitations. Those contribution limitations are as follows:
• The combined employer contributions and the employee elective deferrals (the employee’s contribution) per employee is limited to the lesser of 100 percent of the employee’s compensation or $53,000, with an additional $6,000 deferral for employees age 50 or older at the end of the year.
• The amount of compensation that is used in determining employer and employee contributions is limited to $265,000 per participant.
• The employees’ elective deferral is limited to $18,000, with an additional $6,000 deferral for employees age 50 or older at the end of the year.
This type of plan may have setup costs and administration fees associated with it but is managed by professionals. In addition, 401(k) plans with more than 100 employees may requirement an annual audit of the plan.
In addition to a traditional 401(k) plan, employers may also offer a Roth 401(k) plan, which allows employees to contribute to it with after-tax dollars, with the ability to take tax-free distributions from the plan upon retirement. However, employees are taxed on the 401(k) contribution in the year the contribution is made.
Defined-benefit plans. A defined-benefit plan can also be established by just about any employer, and the plan has the same employee eligibility requirements as a 401(k) plan. In most cases, a defined-benefit plan is funded solely by the employer and requires the tool builder to make contributions. The company’s maximum benefit payout per participant is limited to 100 percent of the participant’s average compensation for the three consecutive years of highest compensation, but not to exceed $210,000 per year. One of the biggest advantages to a defined-benefit plan is that it allows for higher contributions to be made compared to any of the other plans available to mold builders.
Understanding the differences in retirement plan types is important in meeting your company’s and your employees’ goals and ensuring the plan is operated correctly under the current tax and ERISA laws. Not only can the right retirement plan be a key benefit in attracting and retaining employees, but it can also generate potential tax benefits, because plan contributions made by the business are deductible as business expenses. There may also be incentives in the form of tax credits, up to $500 for certain ordinary and necessary costs incurred while starting and maintaining the plan, for the first three years, if this is the company’s first time offering the plan. In addition, the company may want to consider the different setup and administration costs associated with each plan. There are many common errors that occur when administering retirement plans, so mold builders must review the requirements under an adopted plan periodically to ensure the plan is following the ever-changing tax law.
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