Planning for Retirement Needs

Copyright © 2006, The American College. All rights reserved. Used with permission.


Planning for Retirement Needs

SEPs, SIMPLEs, and 403(b) Plans

Chapter 6



Chapter 6: SEP, SIMPLE, 403(b)

• SEP• SIMPLE• 403(b) plan



SEP

• Eligibility• 21• 3 years of service in last five with

$500 (2007)• Full and immediate vesting• Discretionary contributions• Allocation as level percent of

compensation or integrated with Social Security (no other choices)



SEP

• Salary deferrals (only in grandfathered-pre ’97 plans)

• Simple document (IRS form available) and no reporting

• Funded with IRAs (no loans, life insurance)



SIMPLE

• Employer cannot maintain any other tax-advantaged plan

• Employer has 100 or fewer employees• Eligibility—must cover those who earn

$5,000 in two prior years• Defer $10,500 (for 2007)• Additional $2,500 deferral for those

over age 50



SIMPLE

• Employer contribution must be either– 100 percent match on first 3 percent

deferral (reduce to 1 percent)– 2 percent nonelective for all eligible

employees• Funded with IRAs

– no loans– no life insurance



Comparison between Profit-Sharing and SEP Plans

Feature Profit-Sharing SEP

Coverage Must satisfy the coverage requirements of 410(b)—which allow some exclusions

Must cover all employees that have earned $500 in any three of the five previous years.

Vesting Profit-sharing contributions can use statutory vesting schedules.

Immediate and full vesting on all accounts.

Contribution Limits

415(c) limit ($45,000 in 2007). 25% deduction limit

415(c) limit ($45,000 in 2007). 25% deduction limit

Flexibility Discretionary contributions. Discretionary contributions

Participant loans

Yes No

Withdrawal restrictions

Plan can allow for liberal withdrawals.

Withdrawals at any time

Investment limitations

Only limited by fiduciary rules including prohibited transaction rules.

Limited by prohibited transaction rules and IRA prohibitions on life insurance and collectibles



401(k) vs SIMPLEFeature 401(k) SIMPLE

Coverage Must satisfy the coverage requirements of 410(b)—which allow some exclusions

Must cover employees that have earned $5,000 in any two previous years.

Vesting Employee full vesting. Profit-sharing statutory vesting. Matching top-heavy.

Immediate and full vesting on all accounts.

Deferral limits $15,500 (as indexed for 2007)$5,000 catch-up contribution (2007)

$10,500 (as indexed for 2007$2,500 catch-up contribution (2007)

Contribution flexibility

Matching contributions and/or non-elective profit-sharing contributions.

Choice between a stated matching contribution or a non-elective contribution.

Total contributions

Salary deferrals plus employer contributions total $45,000 (limit of 2007)

Total contribution can equal salary deferral plus the stated employer contribution.

Nondiscrimination testing.

ADP test applies to salary deferrals. ACP applies to matching contributions. Profit-sharing satisfy 401(a)(4)

No nondiscrimination testing required. Employer contributions are subject to very specific limits.

Participant loans Yes No

Withdrawal restrictions

Hardship withdrawals on the salary deferral account. More liberal on the profit-sharing and matching

Withdrawals at any time. However, as with any distribution they subject to income tax consequences.

Investment restrictions

Only limited by fiduciary rules including prohibited transaction rules.

Limited by prohibited transaction rules and IRA prohibitions on life insurance and collectibles



403(b) Plans

• Only established by 501(c)(3) and public schools

• Can’t cover independent contractors

• Funded with annuities and mutual funds



403(b) Plans

• Loans• In-service withdrawals upon

financial hardship• Must cover employees willing to

defer $200



403(b) Contribution Limits

• Same salary deferral limit as 401(k)

• Total contributions subject Code Sec. 415 dollar limit

• Additional catch for 15 years of service



403(b) Plans Only with Employee Salary Deferrals

• Not covered by ERISA• Relationship between employee

and service provider



403(b) Plans withEmployer Contributions

• Covered under ERISA• Must meet qualified plan coverage

requirements



403(b) Plans withEmployer Contributions

• Covered under ERISA• Must meet qualified plan coverage

requirements



Which Plan is Best?

• Survey, Inc. wishes to establish a tax-advantaged plan for its employees. The company is relatively new, and profits fluctuate wildly. The employer would like to reward employees when the company does well, and is somewhat concerned that the company has no retirement plan at all, which might make it difficult to attract experienced people to work there. The company is concerned about the costs of maintaining the plan.



Which Plan is Best?

• Near Retirement, Inc. is a closely-held company whose original owners are about to retire. The company has a defined-benefit pension plan, which has already served the purpose of providing benefits for the current owners. Assume that the owners do not have family members interested in the business, the employees have worked for them for a long time, and that the employees are potential buyers of the company.



Which Plan is Best?

• Stable, Inc. has had a modest money-purchase pension plan for a long time. Participation in the plan precludes employees from participating in a tax-deferred IRA. The company realizes that the plan is not adequate but can’t afford additional retirement benefits.



Which Plan is Best?

• Teeny-tiny Corp. has four employees. The owner realizes that competing employers are sponsoring 401(k) plans. To compete with the other employers the owner would like a similar plan but is not willing to pay the administrative expenses associated with that type of plan.



True/False Questions

• A SEP may provide that participants only become fully vested after completion of 5 years of service.

• An employer does not have to make a contribution to a SEP for a part-time employee earning $5,000 with 4 years of employment.

• A sponsor of a SIMPLE can make contributions on a discretionary basis.

• The assets of a 403(b) plan may be invested in any type of investment option available to a qualified plan.



True/False Questions

• A sponsor of a SIMPLE can make contributions on a discretionary basis.

• The assets of a 403(b) plan may be invested in any type of investment option available to a qualified plan.

Documents

Planning for Retirement Needs