Building a Retirement Program

for BusinessPresented by(Name, CPA)

Member, The Ohio Society of CPAs

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Types of Retirement Plans

• Payroll Deduction IRAs• SEPs• SIMPLE IRAs• 401(k) Plans• Profit-Sharing Plans• Money Purchase Plans• Defined Benefit Plans

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Payroll Deduction IRA• Available to any size business, even the

self-employed• Easy to set up and operate• Low administrative costs• Only your employees make contributions• Employers are only responsible for

transmitting the employee’s authorized deduction to the financial institution

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Simplified Employee Pension Plan (SEP)

To establish a SEP, you:• Can be a business of any size, even

self-employed• Must adopt a SEP plan document• Generally can’t have any other

retirement plan

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Simplified Employee Pension Plan (SEP)

Advantages:• Easy to set up and operate – usually

just a phone call to a financial institution gets things started

• Low administrative costs• Flexible annual contribution

obligations – great if cash flow is an issue

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SIMPLE IRA PlanTo establish a SIMPLE IRA plan:• Have a business with, generally, 100

or fewer employees• Complete 1-2 forms• Can’t have any other retirement

plan

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SIMPLE IRA Plan

Advantages:• Easy to set up and run – usually just a phone

call to a financial institution gets things started

• Low administrative costs• Employees can contribute, on a tax-deferred

basis, through convenient payroll deductions• Employers can match the employee

contributions of those who decide to participate, or to contribute a fixed percentage of all eligible employees’ pay

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401(k) Plans

• A 401(k) plan is a qualified profit-sharing, stock bonus, pre-ERISA money purchase pension or a rural cooperative plan.

• It allows employees to elect to have the employer contribute a portion of the employee’s cash wages to the plan on a pre-tax basis.

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401(k) PlansTwo of the tax advantages:• Employer contributions are

deductible on the employer’s federal income tax return as long as the contributions do not exceed the limitations described in section 404 of the Internal Revenue Code.

• Elective deferrals and investment gains are not currently taxed and enjoy tax deferral until distribution.

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401(k) Plans

There are several types of 401(k) plans available:

• Traditional 401(k) plans• Safe harbor 401(k) plans • SIMPLE 401(k) plans

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Traditional 401(k) Plans

• Employees make pre-tax deferrals through payroll deductions

• Employers have the option of making contributions

• Employers must perform tests to verify the program doesn’t discriminate in favor of highly compensated employees

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Safe harbor 401(k) Plans

• Similar to traditional 401(k) plans• Provides for fully vested employer

contributions• Not subject to the complex annual

nondiscrimination tests• Employers must satisfy certain

notice requirements

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SIMPLE 401(k) Plans

• Created for small businesses with 100 or fewer employees

• Provides for fully vested employer contributions

• Not subject to the complex annual nondiscrimination tests

• Employees eligible to participate in a SIMPLE 401(k) plan may not receive any contributions or benefit accruals under any other plans

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Profit Sharing Plans

• Allow for other retirement plans• Are available to businesses of any

size

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Profit Sharing Plans

Pros and cons:• Greater flexibility – contributions are

strictly discretionary, good if cash flow is an issue

• Administrative costs may be higher than under more basic arrangements, though pre-approved plans are available that might cut costs

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Profit Sharing Plans

Pros and cons:• Must be careful that benefits do not

discriminate in favor of highly compensated employees

• Employer contributions only

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Profit Sharing Plans

Determining how contributions are divided

Comp to Comp plan:• Calculate sum of total employee

compensation• Determine what percentage is

earned by each employee• Use that percentage to distribute

contributions04/18/23 17

Money Purchase Plans

With a money purchase plan, employers:

• Must make a set contribution each year

• Can have other retirement plans • Can be a business of any size • Can use pre-approved money

purchase plans to cut down on administrative costs

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Money Purchase Plans

Pros and Cons:• Can grow larger account balances than under

some other arrangements • Administrative costs may be higher than

under more basic arrangements • Need to test that benefits do not

discriminate in favor of the highly compensated employees

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Money Purchase Plans

Pros and Cons:• An excise tax applies if the minimum

contribution requirement is not satisfied• Employer and/or employee can contribute

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Defined Benefit Plans

Pros:• Significant benefits possible in a

relatively short period of time • Employers can contribute (and

deduct) more than under other retirement plans

• Plan provides a predictable benefit

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Defined Benefit Plans

Pros:• Plan can be used to promote certain

business strategies by offering subsidized early retirement benefits

• Can be combined with other retirement plans

• Available for businesses of any size

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Defined Benefit Plans

Cons:• Must have an enrolled actuary determine the

funding levels and sign the Schedule B • Cannot retroactively decrease benefits • Most costly type of plan • Most administratively complex plan • An excise tax applies if the minimum

contribution requirement is not satisfied

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Additional Resources

This information is adapted from the IRS Retirement Plans Community.

For additional resources and forms, visit www.irs.gov/ep.

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For Further Information

For further information or assistance with retirement plans, please contact me:– Name– Company– Address– E-mail– Phone

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