How to Choose a Retirement Plan€¦ · retirement, you could be making a big mistake: • Many workers retire sooner than planned — often due to the unexpected, like health problems.1

ADP SMALL BUSINESS GUIDEBOOK

Small Business Guidebook

How to Choose a Retirement Plan

While growing and developing your business may be your current priority, successful business owners are always looking to the future. Even if you plan to work forever, adding a retirement plan to your business is a smart move. Whether you’re looking to save for your own retirement, get big tax breaks or provide competitive benefits to your employees, retirement plans deliver some big advantages for small business owners.

If you’re trying to make sense of how to save for your future as a business owner, this guide contains practical information about how to choose the right plan for you and your business. It doesn’t have to be complicated. Now let’s get started.

Your business is your passion. You’re doing what you love, and you’re in charge.

1 ADP Small Business Guidebook | How to Choose a Retirement Plan


Section 1

Tax Benefits for You and Your Business

Section 2

Workforce Rewards

Section 3

Substantial Savings Potential

Section 4

Things to Keep in Mind

Section 5

Know Your Options

Section 6

Making Plan Administration Easy

Section 7

About Plan Administration

Section 8

Important Plan Dates

Section 9

Ask the Professionals

Section 10

Helpful Websites

Contents

Section 1 Tax Benefits for You and Your BusinessOne of the most appealing things about retirement plans is the substantial savings opportunity they offer business owners and their employees. Some plans let you put almost $60,000 away annually for your future, and the tax advantages many plans offer help make them affordable. So, if you’ve gotten a late start at saving, and you’re interested in reducing taxes, a retirement plan is a smart way to do it.


Qualified employers can offset 50% of the costs to establish the plan, up to $500 annually, for each of the plan’s first three years. Check with your tax adviser to see if you qualify for this credit.


Pre-Tax ContributionsSome retirement plans allow you to save with before tax dollars, which can reduce your taxable income and result in savings on your federal income taxes.

Business Tax CreditsYour business may qualify for a business tax credit of up to $500 per year for the first three plan years to apply to plan start-up expenses.

Tax Deductions on Employer ContributionsYou can use your business to fund your retirement when you make employer contributions, which are tax deductible as a business expense.

Retirement Plan Tax Advantages

Section 2Workforce RewardsIf your business relies on employees to keep it humming, a benefits package with a retirement plan can help you hire and keep valued workers.



Today’s workers consider a retirement plan an essential part of an attractive benefits package. In fact, 8 out of 10 workers, when accepting a new position, view financial benefits like a retirement plan a key consideration.1

Financial benefits also encourage healthy turnover and can keep your workforce robust: when older employees are financially prepared, they can retire when they’re ready, which makes room for growth opportunities for other employees and adding fresh talent.

1 Bank of America Merrill Lynch Workplace Benefit Report, June 2012.2 Bank of America Merrill Lynch Workplace Benefit Report, April 2015.3 The 2015 Retirement Confidence Survey, Employee Benefit Research Institute (EBRI), April 2015.

Build a better workforceResearch finds that workers with retirement benefits:

Are more satisfied, engaged, loyal and productive.2 Save, and save more, than those who do not.3

Attract and Retain Employees

1 2

Satisfied

91%With Plan

90%With Plan

60%Engaged

85%No Plan

20%No Plan

9%Loyal

75%Productive

79%

Saving for Retirement $25,000+ Saved

Section 3Substantial Savings PotentialPutting money aside for the future can help you afford the retirement you want, when you’re ready. Retirement plans with high savings limits can help you reach your goals.


If you’re banking on using your business to fund your retirement, you could be making a big mistake:

• Many workers retire sooner than planned — often due to the unexpected, like health problems.1

• Your business may become your biggest asset, but to sell it when you’re ready to retire, you’ll need a buyer — and market conditions could influence its value. This means your business could be worth less than you’d hoped, or you’ll need to put off retiring until you are able to sell.

Even if you love what you do and want to keep doing it, or you plan to use the sale of your business to fund your retirement years, it’s essential to back that plan up with savings. Money you save gives you freedom — to retire when you’re ready, and on your own terms.


A Solid Plan

1 The 2015 Retirement Confidence Survey, Employee Benefit Research Institute (EBRI), April 2015.


Section 4 Things to Keep in MindFirst, let’s think about the main purpose for the retirement plan. Do you want to offer better benefits to attract talent and keep your existing employees happy? Or maybe you’re concerned about your financial future and are looking for the best way to save. Whatever the reason, there’s a plan that can meet your goals and budget.


Why do you want one?

Your income, the size of your business, and certain preferences are also important considerations in your decision:

Most business owners add a retirement plan to their benefits package for one or more of the following reasons.

Save for your own retirement

Capitalize on tax breaks

Offer more competitive benefits to employees

All of the above

Your self-employment income

The size of your business

Your preferences for funding the plan (with employee or employer money, or both)

Your retirement savings goals

Your interest in providing retirement benefits to employees

Your ability to manage plan administration and maintenance


Section 5Know Your OptionsThe most popular types of small business retirement plans include SIMPLE IRA, SEP IRA and small business 401(k) plan. When deciding which is right for your business, consider your business size, your self-employment income, and your preferences regarding plan, such as high contributions or simple administration.

Decide which is right for you.


Simplified Employee Pension Individual Retirement Accounts (SEP IRA)Employers can set up a SEP IRA for themselves and each of their employees. With a SEP, only employers can contribute money to the plan, and it must be an equal percentage for each employee. SEP IRAs are flexible — the employer contribution can change each year, which is a plus if your business has inconsistent cash flow. A SEP IRA allows you to save at a substantial amount, and it’s easy to set up and administer. But, for businesses with many employees, the employer contributions of a SEP can be costly.

SIMPLE IRA PlanSavings Incentive Match Plan for Employees or SIMPLE IRA is specifically designed for small businesses. While businesses with as many as 100 employees may use a SIMPLE IRA for their retirement plan solution, it is typically used by small businesses with less than 10 employees. It allows both employers and employees to put money in the plan (contributions). Employees can contribute a percentage of their salary to their accounts and choose how the money is invested, and the employer is required to make an annual matching contribution. Due to mandatory employer contributions, SIMPLE plans are free of Department of Labor testing requirements. These plans are typically low cost, and easy to set up and administer.

Want more details? Visit the IRS website for resources and information about SEP IRA plans.

More information about SIMPLE plans can be found on the IRS website.


Small Business 401(k) PlanAlmost any type of employer can establish a 401(k) plan — sole proprietors, partnerships, LLCs, corporations and even tax-exempt employers. To receive qualified-plan tax treatment, the employer (who is the plan sponsor) must adopt a plan document which specifies everything that’s necessary to meet every condition in Internal Revenue Code section 401(a). All service providers make available preapproved documents to make meeting these requirements easy.

A 401(k) plan offers greater choices in plan design. For example, employers usually can determine eligibility based on employee age and service. With a 401(k) plan, employees fund their own retirement accounts, and employer contributions are optional. These plans offer high contribution potential, and employees can take loans from plan savings. They can elect to match a percentage of the amount employees contribute to the plan — often called deferral percentage — for the employees participating in the plan. Employers can also establish a vesting schedule for contributions made by the employer. Two common vesting schedules permitted under the Internal Revenue Code for employer contribution accounts are 100% vesting after three years of service, or a graded vesting schedule — 20% after two years of service, 20% after each additional year of service until the employer contribution account is fully vested after six years of service.

401(k) plans require more maintenance and plan administration, and require annual DOL testing. Annual non-discrimination tests for 401(k) plans are mandated

by the Internal Revenue Code to ensure that a plan does not benefit owners and other highly compensated employees too much more than the plan benefits other employees. The Actual Deferral Percentage (ADP) and Actual Contribution Percentage (ACP) tests must be passed in order to satisfy these non-discrimination requirements for the plan to get tax-qualified treatment. There are other non-discrimination tests that must be met for a plan to meet Internal Revenue Code requirements, but these are the primary ones.

If a plan fails either test, the employer must take corrective action to protect the plan’s taxqualified status in the 12-month period following the close of the plan year in which the oversight occurred. Corrective action typically may include returning some deferrals (adjusted for investment earnings and losses) to HCEs. In some cases, correction may involve the forfeiture of some matching contributions by HCEs.

Fortunately, many 401(k) plans offer a variety of plan features and services to help simplify these responsibilities through smart plan design. For example, plans that adopt and follow the rules of a Safe Harbor plan automatically pass non-discrimination requirements because they generally require broad based, fully vested employer contributions. An employer can choose to provide matching contributions or non-elective contributions to satisfy the safe harbor.

Learn more about 401(k) plan setup, eligibility, requirements, and administration on the IRS website.

How the Plans Compare


Business Size

Contribution Type(s)

Annual Employer Contribution Requirement

Compensation Limit

Age 50+ Catch Up Contributions

Maximum Saving Opportunity

Available to any size business

Employer contributions only

None

$265,000

No

Up to 25% of employees’ compensation (up to maximum compensation limit) or $53,000 (2016)

Available up to 100 employees

• Required employer contributions • Employee contributions allowed

Yes. Either match employee contributions dollar for dollar up to 3% of compensation (can be reduced to as low as 1% in any 2 out of 5 years) OR contribute 2% of each eligible employee’s compensation (subject to Compensation Limit)

$265,000 applicable to 2% nonelective contribution

Yes, up to $3,000

For 2016, $25,000 is the maximum annual contribution to a participant’s account and is based on an employer matching contribution limited to 3% of compensation ($12,500 deferral, plus $12,500 maximum match; $3,000 catch-up contribution and $3,000 matching contribution, if applicable). Compensation of at least $416,667 would be required for the $12,500 maximum match. If an employer nonelective contribution of 2% of compensation (limited to $265,000) is elected, the maximum employer contribution is $5,300.

Any

• Optional employer contributions • Employee contributions allowed

No employer contributions are required except if a Safe Harbor plan design is elected

$265,000

Yes, up to $6,000

Up to the lesser of 25% of employees’ compensation (up to $265,000 in 2016) or $53,000 (2016) plus catch-up contribution up to $6,000 (2016)

SEP IRA SIMPLE IRA Plan Small Business 401(k) Plan

How the Plans Compare (Cont.)


Investment Direction

Loans

Eligible Employees

Plan Administration

Required Employer Contribution

Annual Employer Contribution Limit (2016)

Employee Contributions Allowed

Employer chooses how money is invested

Every employee who is 21 or older, is employed by the employer for three of the last five years and has compensation of at least $600 in compensation

No

Easy

Yes

Cannot exceed the lesser of 25% of total compensation, or $53,000 No

Employee chooses how money is invested

Each employee who received compensation of at least $5,000 in any two preceding years — even if they’re not consecutive — and who is expected to get compensation of at least $5,000 in the year for which on is deciding eligibility

No

Easy

Yes

Either match employee contributions dollar for dollar up to 3% of compensation (can be reduced to as low as 1% in any 2 out of 5 years) OR contribute 2% of each eligible employee’s compensation (up to $265,000)

Yes

Employee chooses how employee and employer contributions are invested

Employers may choose eligibility requirements but may not exclude employees who have attained age 21 and are employed by the employer for at least 1 year

Yes (if elected as a plan provision)

Moderate to complex

Optional

Contributions are not mandatory. Employee contributions plus employer matching and/or profit sharing contributions cannot exceed lesser of 100% of compensation (up to $265,000) or $53,000

Yes


How the Plans Compare (Cont.)


Annual Employee Contribution Limit (2016)

Age 50+ Catch Up Contributions (2016)

Total Maximum Contribution (2016)

Loans and Withdrawals

Required Plan Testing

Not applicable

Not applicable

$53,000

• Loans: not permitted • Withdrawals: Any time. May be subject to 10% penalty if under age 59 ½.

No

compensation (up to $265,000) or $12,500

$3,000

$25,000*±

• Loans: not permitted • Withdrawals: Any time. May be subject to a 25% penalty if taken within the first 2 years of beginning participation; 10% penalty may apply after that time if under age 59 ½.

No

$18,000

$6,000

$59,000*

• Loans: permitted • Withdrawals: Not permitted until a “trigger” event occurs, such as certain hardship situations. May be subject to 10% penalty if under age 59 ½.

Yes. However, Safe Harbor Plan will pass 401(k) ADP and ACP tests if Safe Harbor rules are followed.


* Maximum for an individual who has reached 50 years old± For 2016, $25,000 is the maximum annual contribution to a participant’s account and is based on an employer matching contribution limited to 3% of compensation ($12,500 deferral, plus $12,500 maximum match; $3,000 catch-up contribution and $3,000 matching contribution, if applicable). Note: Compensation of at least $416,667 would be required for the $12,500 maximum match.

Section 6 About Plan AdministrationLike other employer benefits, retirement plans require administration and oversight. Some plans, like SEP and SIMPLE IRAs, have minimal requirements and are fairly easy to maintain. A 401(k) plan can be moderate to complex to administer. Most 401(k) and tax qualified plans are subject to requirements under the Internal Revenue Code and the Employee Retirement Income Security Act (ERISA) that provide minimum standards that protect individuals in retirement plans. SIMPLE and SEP IRAs are not subject to most ERISA requirements.



Plan Sponsor Responsibilities

Generally, plan sponsor responsibilities include providing required documents and information, filing reports and forms with the Federal government (such as Form 5500 Annual Return Report), and making timely participant contributions, loans and distributions. A written plan document is also required. Following its terms is a key responsibility, as it serves as the foundation for guiding day-to-day plan operations.

Under ERISA, plan fiduciaries (including those who manage the plan and its assets) must act solely in the interest of the plan beneficiaries. The role of the fiduciary should be taken seriously — they can be held personally liable for plan losses or profits from improper use of plan assets that result from their actions.

Here’s the good news: there are ways to simplify plan administration and help provide some relief from fiduciary responsibilities.

Fiduciaries should: Manage the plan with the exclusive purpose of providing the plan’s retirement benefits to participants

Ensure that the investment menu offers a broad range of diversified investment alternatives

Monitor plan investment alternatives so that they remain prudent for the plan

Ensure that the costs of plan administration and investment management are reasonable

To read up on the details about retirement plan fiduciary responsibilities, go to the DOL website.

Section 7 Making Plan Administration Easy401(k) plans offer the flexibility to customize the plan according to your business needs and goals, which can include making plan administration easy and helping to limit fiduciary liability through plan features.



Customize your plan according to your business needs and goals

• As a fiduciary, you may wish to hire a professional to carry out functions you may not have the expertise to manage. For example, you may prefer to outsource the functions of choosing, diversifying, and monitoring of plan investments to an investment advisor.

• A plan provider you choose can perform many administrative responsibilities for you, such as recordkeeping the flow of money in/out of the plan, providing required communications to employees, and performing annual plan testing.

• Plan customization options can be used to design a plan to help fulfill administrative obligations. For example, plans that elect and meet the requirements of a Safe Harbor Plan design, which requires mandatory employer contributions, will pass certain 401(k) nondiscrimination plan testing.

Remember, the fiduciary is ultimately responsible for making decisions about the plan, including decisions to hire and monitor service providers to help with fiduciary and administrative tasks. It’s smart to document the basis for those decisions and how they were made.

It’s a good idea to consult your trusted advisers for guidance in choosing the right type of plan — and plan design features for your business.

A better plan design can lead to retirement plan success Many retirement plan providers allow for plan customization with features and services to help better manage and meet plan obligations and help participants get retirement ready:

Automatic enrollment

Automatic deferral rate increases

Safe Harbor plan design

Matching contributions

Target date retirement funds

Investment advice services for participants

Compliance support

Trustee services

Co-fiduciary investment advice services for plan sponsors


Section 8Important Plan DatesThere are different deadlines for establishing and funding the different types of plans. Keep these dates in mind when getting your plan set up.

Deadlines for the plan you choose


Establish the Plan Fund the Employer Contributions to the Plan

April 15 or due date of tax return, including extensions


October 1


December 31




Section 9Ask the ProfessionalsWhile this guide provides useful information about retirement planning, it’s a good idea to speak with your business accountant, tax or financial advisor about it as well. They can help you find a plan that’s the right fit and review the important tax, business and other implications of directing a plan.

Speak to a Trusted Advisor

Business AccountantTax preparation and strategy, growth opportunities, risk management, bookkeeping, and general financial planning, organization structure, profit distribution.

Why you might need oneThe guidance a small business accountant provides can be invaluable, especially if your personal and business finances are closely tied.

Financial AdvisorAdvice on investment and retirement planning.

Why you might need one:To make sure you and your family are financially prepared for your future.


Section 10Helpful WebsitesGeneral Plan Informationhttp://www.irs.gov/Retirement-Plans/Plan-Sponsor http://www.dol.gov/ebsa/publications/401kplans.html

Retirement Plan Fiduciary Responsibilityhttp://www.dol.gov/ebsa/publications/fiduciaryresponsibility.html


These materials are not intended to describe any specific products or services available through ADP, LLC or its affiliates (ADP). ADP does not offerinvestment, financial, tax or legal advice or management services. Nothing in these materials is intended to be, nor should be construed as, advice or a

recommendation for a particular situation, individual or company. Please consult with your own advisors for such advice. Third party web site information is provided for your information only. ADP does not endorse, nor accept any responsibility for content, products and/or services provided by non-ADP sites.

ADP and the ADP logo are registered trademarks of ADP, LLC. ADP – A more human resource. is a service mark of ADP, LLC. Copyright © 2015 ADP, LLC. 99-3879-102015

To find out about the retirement products and services available to help you access a new road to retirement please contact ADP today.

800-432-401k | visit www.adp.com/401k

Start as soon as you can — that’s the first rule of planning and saving for the future.

A retirement plan is a smart benefit for you, your employees and your business. And now that you know the basics, you’re ready to get started.

Documents

How to Choose a Retirement Plan€¦ · retirement, you could be making a big mistake: • Many workers retire sooner than planned — often due to the unexpected, like health problems.1