FIN
Module 1 - An Overview of Retirement Planning.docx

While seps are often compared to profit sharing plans

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While SEPs are often compared to profit-sharing plans due to their discretionary contribution feature, SIMPLEs are sometimes compared to 401(k)s because they offer employee salary deferrals and employer matching. Both SEPs and SIMPLEs must cover part-time employees assuming they meet a very low threshold of hours worked ($600 for SEPs and $5,000 for SIMPLEs). Traditionally, we think of SEPs and SIMPLEs as plan types for small employers. However, some large employer’s, like Starbucks, do offer retirement plan access for their part-time employees. They obviously have more than 100 workers so they are offering a 401(k) and not a SIMPLE. The SIMPLE mandates that part-time employees must be covered. A 401(k)
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could cover part-time employees, but there is no mandate to do so…this provides a larger employer the flexibility to cover part-time employees now, but they could eliminate this option if business conditions necessitate. A SIMPLE is easier to administer than a 401(k), albeit with more rigid contribution rules and lower employee deferral limits. Unlike 401(k)s, SIMPLEs also eliminate the possibility for loans. SIMPLEs offer reduced flexibility for the employee’s but the lack of a loan provision is actually healthier for their long- term retirement potential. One important distinction is that an employer who offers a SIMPLE plan cannot offer any other form of retirement savings account. For example, an employer cannot offer both a SIMPLE and a Profit Sharing Plan. There is a new government program to help encourage small businesses to install a new plan. It is called the Retirement Plans Startup Costs Tax Credit. To qualify for this credit, an employer must have 100 or fewer employees who received at least $5,000 in compensation during the preceding year. This is essentially the SIMPLE plan requirement. At least one plan participant must be an NHCE, and the participants in the new plan were not participants in another plan offered by the same employer in the previous 3 years. An employer has the opportunity to either deduct the actual startup costs or to take the credit, which is limited to 50% of the actual startup and education costs subject to a maximum credit of $500. Small businesses will need to figure out which way is financially better for them, but at least they have options. This tax credit is available for the first 3 years of the new plan. In the first year, the relevant costs will likely be installation costs, but in years 2 and 3, the employer can still deduct the cost of providing investment education through a financial professional. You can see the IRS release on this topic here. (Links to an external site.)Links to an external site. A SIMPLE 401(k) plan is a hybrid investment option that falls somewhere between a SIMPLE itself and a 401(k). The primary advantage of this plan type is that it does not require non-discrimination or top- heavy testing like the 401(k). This can be very appealing for a small business owner because this represents a direct time and cost savings. Because of the 401(k) pedigree, plan loans are also back on the
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  • Spring '14
  • VOSS,JAMESA
  • ERISA

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