Carissa A. Conley is a tax manager at CMJ,
LLP in Glens Falls.
BY CARISSA A. CONLEY, CPA
If you own a business, establishing a retirement
plan for yourself and your employees offers tax
advantages and other benefits such as attracting
and helping to retain high-quality employees in a
competitive market.
As an employer, you have three popular options
for a retirement plan – a Simplified Employee Pension
Plan (SEP), a Savings Incentive Match Plan for
Employees (SIMPLE), and a 401(k) Plan. While
each type of retirement plan has its benefits, the
401(k) allows for higher contributions and more
flexibility in design to manage business costs and
taxes. In this article, we will focus on 401(k) plans.
You can design your 401(k) plan to reward
employees, build in incentives to keep employees
at the company, or maximize owners’ benefits.
You have the discretion over whether to match
employee deferrals and whether to make discretionary
profit sharing contributions for all
participants. The contributions you make for your
employees, both matching and profit sharing, are
deductible business expenses.
A 401(k) plan allows for certain restrictions to
ensure only your long-term and loyal employees
receive the benefits of participating in the plan.
You can require a certain number of hours and
length of time worked before employees are
eligible to participate in the plan, and limit the
participation of certain types of employees and
underage employees.
You can also subject employer contributions
to a tiered vesting schedule whereby certain
employer contributions return to the company
if an employee leaves after only a year or two of
employment.
As the business owner, you can maximize your
own personal retirement contributions. The elective
deferral limit for 2016 is $18,000 or $24,000 if
you are age 50 or older. If you incorporate profit
sharing (with or without a match) into the 401(k)
plan, you can contribute up to the maximum total
of $53,000, or $59,000 if you are age 50 or older,
for yourself.
Other benefits of establishing a 401(k) plan
include being able to contribute to a Roth account
without any income limits (compared to a Roth
IRA that begins to phase out eligibility once your
2016 joint income reaches $184,000), a federal tax
credit for the first three years of plan start-up if
you have at least one employee who benefits from
the plan, and business deductions for all plan
administration costs.
A 401(k) plan generally has higher administrative
costs than SIMPLEs and SEPs because it requires
annual filings with the federal government.
The IRS and U.S. Department of Labor require that
information about the plan and its operations be
disclosed on Form 5500 Annual Return/Report of
Employee Benefit Plan each year.
401(k) plans also require annual testing for
discrimination. A traditional 401(k) plan is tested
to ensure that the contributions for employees are
comparable to the contributions made for owners
and managers. You can eliminate some of the
required testing by making the plan a safe harbor
401(k) plan and committing to a specific level of
annual matching contributions for all employees.
The costs and benefits of a 401(k) plan for
your business should be compared to the costs
and benefits of the other types of retirement plans
before making the decision of which type of plan
to establish.
Conley is a tax manager at CMJ, LLP in Glens
Falls.