Comparing Plans 2018-07-16T21:44:32+00:00

Plan Comparison Guide A Quick Reference Guide

Defined Benefit Individual401(k)/ Profit Sharing SEP IRA SIMPLE IRA Cash Balance Defined Benefit 401(k)/Profit Sharing
Who is it best for? High income self-employed individuals, owner + spouse or family businesses that want to maximize tax savings with large, tax-deferred contributions. This plan may be combined with an individual 401(k) plan to increase contribution and flexibility. Self-employed individuals, owner and spouse, or family businesses that want optional contributions. This plan is not suitable for a business if there are non-family employees. Self-employed individuals and business owners who want the option to make contributions for all employees Business owners who want an easy way to make small contributions on behalf of employees Owners of profitable small businesses who want large deductible contributions for themselves and are willing to make limited contributions for employees. A Safe Harbor 401(k)/Profit Sharing plan often is combined with a cash balance plan. This allows the business owner to increase their contribution and control the cost of providing retirement benefits for employees. Small and large businesses that want employees primarily to fund their own retirement.
What is the maximum contribution for 2018? There are no specified limits on the contribution. An individual’s contribution is calculated and cannot exceed the amount required to pay a specified benefit in retirement. For 2018, the annual benefit limit is $220,000. $55,000 ($59,000 if age 50+) $55,000 $12,500 ($15,500 if age 50+) in employee deferrals for 2016. With matching contribution, maximum contribution is $25,000 ($31,000 if age 50+) There are no specified limits on the contribution; the limit is on the allowable benefit at retirement. For 2018, the annual benefit limit is $220,000. $55,000 ($61,000 if age 50+)
How is contribution determined? “Depends on several factors including income, age, years of service. Contributions can be as high as 100% of compensation for sole proprietors; in some cases, for corporations, can exceed 100%. The benefit limit is 100% of compensation (up to $220,000), reduced pro rata for years of service less than 10.
– This limit is further reduced actuarially if benefits begins prior to age 62
– This limit is increased actuarially for benefits beginning after age 65. For this reason, contributions for older participants can be much higher.”
For 2018, 100% of net income up to the maximum of $18,500 ($24,500 if age 50+) may be contributed in salary deferrals. In addition, a profit sharing contribution of up to 25% of net income may be made for a combined total contribution not to exceed $55,000 (or $61,000 if age 50+). For 2018, up to 25% of compensation or $55,000, whichever is less, may be contributed. Employee deferrals are not allowed. Employer contribution percentage must be the same for all eligible employees. For 2018, employees may contribute up to the maximum of $12,500 ($15,500 if age 50+) or 100% of income, whichever is less, in salary deferrals. In addition, the employer may make a matching dollar for dollar contribution up to 3% of compensation. Similar to defined benefit plans, the cash balance contributions depends on several factors including income, age, years of service. Contributions can be as high as 100% of compensation for sole proprietorships and in some cases, for corporations, can exceed 100% of compensation. When combined with a Safe Harbor 401(k)/Profit Sharing plan, the contributions for owners may be higher while contributions for employees are limited. For 2018, 100% of compensation up to the maximum of $18,500 ($24,500 if age 50+) can be contributed in salary deferrals by the employees. In addition, employers may make a profit sharing contribution up to 25% of employee’s compensation for a combined total contribution not to exceed $55,000 ($61,000 if age 50+). For Safe Harbor plans, compliance testing is required to determine employer contributions.
Are annual employer contributions required? Generally, yes No No, however if employer makes a contribution in a particular year, then contributions are required for all eligible employees for that year. Yes, employers must make either matching or non-elective contributions for all eligible employees. Yes No, however if employer makes a contribution in a particular year, then contributions are required for all eligible employees for that year. For Safe Harbor plans, contributions are required each year to comply with IRS regulations.
What are the key advantages? The potential to allow the largest tax deductible contribution for the business owner Self-employed individuals and owner-only businesses can make discretionary contributions annually, larger than a SEP IRA allows. Self-employed individuals and employers can make discretionary contributions annually. The plan can be set up after tax year ends and requires no government reporting by the employer. Allows employees to make deferrals for themselves. Simple to setup with no government reporting required by the employer. Has the potential to provide larger tax deductable contribution for owners than any other retirement plan while providing greater control in determining the employer’s contributions for employees. Allows employees to make salary deferrals for themselves and employers to make contributions on behalf of employees
What is the deadline for opening the plan? Plan must be opened by fiscal year end, usually December 31 Plan must be opened by fiscal year-end, usually December 31 Plan must be opened by the employer’s tax filing deadline, with extensions October 1 for the current tax year Plan must be opened by fiscal year-end, usually December 31. Plan must be opened by fiscal year-end, usually December 31.
When are contributions due? Contributions are due at the tax filing deadline, with extensions but in no case later than 8.5 months after the fiscal year-end Salary deferrals are due within 15 days of year end for Corporations. Profit sharing contributions are due at the tax filing deadline, with extensions, but in no case later than 8.5 months after the fiscal year-end. Contributions are due by the business’s tax filing deadline, with extensions Employee salary deferrals from the last pay check or by year-end. Employer contribution due at tax filing deadline, with extensions Contributions are due at the tax filing deadline, with extensions, but in no case later than 8.5 months after the fiscal year-end. Salary deferrals are due within 15 days of year end for Corporations. Profit sharing contributions are due at the tax filing deadline, with extensions, but in no case later than 8.5 months after the fiscal year-end.
When are contributions due? One trust account is setup for the plan which is a pooled investment account A trust account is setup for the plan Individual accounts are set up for each eligible employee Individual accounts are set up for each eligible employee One trust account is set up for the cash balance plan which is a pooled investment account. If a Safe Harbor 401(k) profit sharing plan is opened with the cash balance plan, individual 401(k) accounts are set up for each eligible employee. Individual accounts are set up for each eligible employee

NOTES

  1. SEPs limit how much you can save and how much you can reduce your tax liability. A SEP can only be as much as 20% of your net earnings, up to a maximum of $55,000 for 2018. That might not be enough for high-earners looking to reduce their tax liability and plant the seeds for a comfortable retirement.
  2. The Roth IRA is a popular program. It’s a retirement account with no up-front tax, but all future withdrawals that follow Roth IRA regulations are tax-free.

Defined Benefit Plans and Cash Balance Plans provide the highest possible contribution limits among qualified retirement plans.  You might be able to combine a Cash Balance Defined Benefit Plan and a Safe Harbor 401(k)/Profit Sharing Plan to get ahead of the curve for taxes and savings. These programs give business owners the potential to make large deductible contributions for themselves — often $150,000 or more annually — while limiting the total cost of benefits for employees.

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