Module 1 - An Overview of Retirement Planning.docx

One distinguishing feature that employers really need

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One distinguishing feature that employers really need to be aware of is the vesting requirement. Within a SEP, employees must be immediately 100% vested. If that is a problem for a given employer, then they need to consider alternative plan types. A SEP has some applicable rules that mimic qualified plans, while others are very similar to IRAs. Like a qualified plan, SEPs can contribute up to 25% of gross compensation subject to a maximum contribution of $55,000 (2018 limit). While 401(k)s are subject to ADP compliance testing, SEPs adhere to top-heavy rules, which will be thoroughly described in a later lesson. To summarize our discussion on SEPs, these plan types are most often chosen by small businesses because they are easy to establish and lower cost to operate. The simple allocation formula is also attractive to small business owners. One caveat is that they must make participation available to any employee who is at least 21 years old and has worked for the company for 3 out of the last 5 years with at least $600 (2018 limit) per year in earnings in each tax year. This means that part-time employees will potentially be covered by a SEP while they would not be eligible for many other plan types. If a 25-year old employee has earned only $1,500 in each of the last three years, then they must be included in the plan.
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SIMPLE Plans A savings incentive match plan for employees (SIMPLE) plan is available to any employer with fewer than 100 employees. They must cover any employee who has earned at least $5,000 in any previous two years, and they are reasonably expected to earn at least $5,000 again this year. If an employee earns $4,000 in year 1, $5,000 in year 2, $3,000 in year 3, $5,000 in year 4, and is reasonably expected to earn at least $5,000 during the current year, then they are eligible for coverage by a SIMPLE plan. The years of $5,000 earnings need not be consecutive for eligibility to apply. Like a SEP, a SIMPLE plan will also be available to many part-time employees. Employees covered by a SIMPLE plan can defer up to $ 12,500 (2018 limit) of their salary, which is subsequently matched by the employer. Notice that this deferral amount is less than a SEP and also less than a 401(k). The employer match must be either (1) a dollar-for-dollar match up to 3% of total compensation or (2) a flat 2% of an employee’s total compensation regardless of whether or not the employee contributes out of their gross pay. One neat feature is that if the employer picks option #1, then they could drop their match from 3% to 2% for any 2 years during a 5-year period. This gives the small business a little flexibility. Because a SIMPLE plan involves employee contributions, they also offer a catch-up provision of $3,000 (2018 limit). Because SIMPLEs are funded with an IRA, they have IRA-inspired limitations. SIMPLEs cannot offer loans or insurance products. They have certain asset class restrictions which follow IRA asset class restrictions, and they share tax rules with IRAs. Again, we will explore each of these traits in detail when we discuss IRAs in another lesson.
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  • Spring '14

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