Business Meeting

GROUP LIFE INSURANCE

QUALIFIED PLANS

One of the benefits of owning a business is that you have tax-favored options to save for retirement that non-business owners don’t have. Your business can sponsor a qualified plan which may be designed to drive the majority of the benefits to you. This is a classic way to shift business dollars to you for retirement. Benefits include:

  • Contributions to the plan are tax deductible to the business.

  • Contributions are not currently taxable to the participants.

  • Contributions made on behalf of employees can be paid with dollars that would have otherwise been spent on taxes.

  • Earnings on contributions grow tax deferred.

  • Qualified plans are protected from creditors.

  • Provides a valuable benefit to employees and helps to attract and retain employees.

  • Taxation of benefits are deferred until taken in the future.

There are essentially two categories of qualified plans - Defined Contribution Plans and Defined Benefit Plans. With defined contribution plans, you define how much money you want to contribute to the plan. What is available for retirement will depend on the contributions actually made and the earnings on those contributions. With defined benefit plans, your retirement benefit is defined under the plan. (For example 75% of the highest five consecutive years' salary over the last 10 years.) The contribution amount will be based on a number of factors, including the benefit being promised, the number of years until retirement and an interest rate assumption.

PROFIT-SHARING PLANS

  • Allows you to change the plan contribution each year or even decide not to make a contribution in certain years.

  • You can establish eligibility requirements that employees must meet to receive a contribution.

  • Can be designed to favor select employees, including you.

TYPES OF PROFIT-SHARING PLANS

  • Traditional Profit Sharing: Everyone receives the same percentage of pay as a contribution. This plan is appropriate if only owners of the business are eligible to participate.

  • Integrated Profit Sharing: Those employees earning over the Social Security wage base receive a higher percentage of the plan contribution than those earning under the Social Security wage base. This plan is appropriate if you are younger than most of your employees but earn a higher salary.

  • Age-Weighted Profit Sharing: The majority of the contribution goes to those older employees who are closer to retirement. This plan is appropriate if you are older than your employees or if you want to favor older, long-time employees.

  • Cross-Tested Profit Sharing: Allows you to place employees in different 'groupings' allowing you to allocate a higher amount of the contribution to yourself and a lower amount to employees. This plan is appropriate if you are five to ten years older than the average age of your employees.

 

401K PLANS

  • Traditional 401(k): does not require you to make a matching contribution, but it could limit how much you can defer.

  • Safe Harbor 401(k): does require you to make a matching or non-elective contribution, but it will enable you to defer the maximum allowed by law. With auto enrollment, employees are automatically enrolled and must elect not to participate if they do not want to defer. Auto enrollment can help increase the participation in the plan.

  • Solo 401(k): available for businesses that do not have eligible employees. This plan allows the business owner, and key/highly compensated employees, to make elective salary deferrals as well as employer profit sharing contributions. These plans can also be combined with a Defined Benefit plan to get the maximum tax-deductible contribution allowed by law.

 

DEFINED BENEFIT PLANS

  • Traditionally Funded Defined Benefit Plans - this type of plan engages an actuary who, based on certain assumptions, determines how much money must be contributed to plan a fund the determined pension benefit. Plan formulas can be as simple as everyone received the same percentage of pay benefit of they can be designed to favor older employees or select groups of employees.

  • 412(e)(3) Fully Insured Defined Benefit Plan - with this type of plan, instead of engaging an actuary to determine the cost to fund benefits, the cost is determined based on the guaranteed* values of an annuity and/or life insurance policy that must be used to fund the plan. This type of plan will generate a higher tax deductible contribution than a Traditional Defined Benefit plan. Because the plan formula for this type of plan is a percentage of pay benefit, the plan is not ideal for employers who have a number of employees who are the same age or same age or older than the owners.