Retirement FAQs

When considering a retirement plan for your company, cost is a large factor in implementing and maintaining a savings plan for you and your employees. In recent years however, retirement plan costs have come down considerably, making it affordable for small and medium sized business to provide a savings benefits package to attract and retain their employees.

With respect to a basic 401(k), there are two main costs when implementing a plan: 1) Start-up costs and 2) ongoing costs. Start up costs for the industry range from $700-$1500 and include plan design, setup and filing the new plan with the IRS. Once your plan is in place, general ongoing costs can average about $2000-$4000 per year for recordkeeping and administrative fees. Investment advisory and custodial fees average an additional 2% of assets. By far, the largest ongoing cost would be employer matching contributions, although not mandatory. Typically employers bear the costs of the match contributions, recordkeeping and administrative fees and the employees pay the investment management and custodial fees. However, a fee structure could be designed whereby employees pay the majority or all of the plan’s cost.

Retirement plan costs can vary greatly depending on employer matching, number of employees, funds used, complexity of plan design, and size of assets. In some cases, a 401(k) may not be the most appropriate plan for your company due to issues other than cost, like the number of key versus non-key employees contributing into the plan. You may need a more custom plan like a new comparability design or a lower cost plan like a SIMPLE IRA.

It’s a lot to keep straight. Rathbun Sargent has formed strong relationships over the years with trusted partners who are specialists and leaders in the small business retirement plans market. From educating and assessing, to sourcing, implementation, and ongoing support, we can put together the best team to head your retirement benefits program.

Generally, an employer does not need to make matching contributions. In the basic sense, most 401(k)’s can have one of two types of employer contributions:

• A traditional 401(k) plan gives the employer the option to match employee contributions, and the match can be structured on a vesting schedule. High employee participation and contributions, especially non-key or non-highly compensated employees, may allow this type of employer matching contribution to be more effective.
• A safe harbor 401(k) plan requires employers to make matching contributions, usually 3% of which is immediately vested. Plans with highly-compensated and key employees who desire to maximize their contributions may require safe harbor contributions to meet nondiscrimination rules.

Although 401(k)’s don’t require an employer to make matching contributions, small business owners are usually looking for ways to attract and retain talent, reduce taxes, and save for their own nest egg. Establishing a company retirement plan can address all of these concerns. Plans can be customized to favor owners and key employees, reduce employer contributions in years of low or no profits, and at the same meet compliance requirements.

It can be confusing to figure out the myriad of options that seem attractive but may not be the best option for you and your employees. Because each company is unique, understanding your company structure, key employees, tax situation, turnover, budget, administrative needs and ongoing support are important considerations to help Rathbun Sargent narrow down the best options for your organization.

As mentioned in previous FAQs, retirement plans can be customized to favor owners and key employees. Because retirement plans fall under ERISA rules, favoring some and not other employees is a red flag. Fortunately, you can design your plan to meet your goals as long as you address all compliance requirements, especially nondiscrimination rules.

• SIMPLE plan: A SIMPLE IRA plan is not subject to nondiscrimination tests nor top-heavy requirements. There is also no Form 5500 to be filed. As a result, there are minimal plan administration costs, and highly paid employees or owner-employees will not be restricted in their ability to defer as the result of low participation by the lower paid employees.
• Safe Harbor 401(k): A safe harbor 401(k) plan permits the owner and other highly compensated employees to defer the maximum without regard to the deferral levels of the non-highly compensated employees.
• Age-weighted or comparability (cross-tested) profit sharing plan: This type of plan utilizes a formula that bases contributions on both age and compensation of eligible employees, similar in concept to a defined benefit pension, but with discretionary contributions. In an age-weighted plan, the participant’s age, or length of time until retirement, is factored into the allocation formula on an individual basis, so older participants receive a larger proportionate share of the contribution because they have fewer years to accumulate investment earnings than those who are younger. The comparability plan allows the employer to select classes of employees that provide different contribution allocation levels for each group. Providing nondiscrimination tests are met, you can allocate a larger proportionate share of the company’s contribution to specific employees that you desire to benefit the most.
• Defined benefit plans: This plan can provide a pre-determined retirement amount for each employee at retirement. It can allow much larger contributions in a shorter amount of time than defined contribution plans like 401(k)s. Organizations with fewer employees, predictable income, where the owner/key employee is older in age and highly compensated will usually benefit the most from this plan design. However, it is is more costly to implement and requires more administrative duties to maintain.

It depends.

401(k)s can be designed to have a Roth component and function similarly to a Roth IRA.
With a traditional 401(k), retirement plan contributions are made pre-tax. In other words, you don’t pay any taxes on the money you put into your plan. Earnings are sheltered from taxes. You pay taxes when you take money out.

Conversely, in a Roth IRA your contributions are after-tax. This means you pay the tax up front before the money goes into the plan. Money grows tax-deferred. When it’s time to take distribution, your money comes out tax-free. (Note that employer matches in the Roth 401(k) are pre-tax, growth on these monies is tax-deferred and withdrawals are taxable).

The choice on whether to contribute to a Roth or a regular 401(k) depends on your present and future tax bracket. If you’re currently in a high tax bracket but believe it will be lower when you retire, a traditional 401(k) avoids the need to pay significant taxes on your contributions right now. Although you will have to pay taxes when you take distribution, a projected lower tax bracket means a lower bill to pay.

A Roth 401(k) starts to make sense if your current tax rate is relatively low and retirement is a long way off. A young person starting a career may fit this profile as earnings are typically less than in future years. Taxes on such contributions won’t take too much of a hit, but since retirement is a long way off, a sizable nest egg can accumulate without the need to pay any taxes when funds are taken out.

In the financial industry, we typically tout that diversification is important to lower risk. Having a non-taxable bucket at retirement, provided by a Roth, can offer you flexibility in your financial planning. Roth 401(k) withdrawals are not included in your adjusted gross income, which helps give you more control over your tax bill when deciding how much to take from your taxable bucket of social security income, pension, and regular 401(k)s or other qualified plans. Additionally, being able to access a non-taxable Roth bucket for income and minimizing income distributions from other taxable sources may also keep you below the income cutoff for the Medicare high-income surcharge, or preserve more of your Social Security benefits from taxes.

If you don’t know how your tax situation may develop, consider diversifying your contributions into both regular and Roth 401(k) buckets. Just remember that the total contributions to both plans cannot exceed the IRS limits.

Taking a loan from an IRA is prohibited. However, the IRS does allow for some hardship withdrawals and exceptions that avoid the early penalty tax.

You can borrow from your 401(k) if the plan allows it. As a rule, you can borrow up to an amount that is the lesser of 50% of your vested balance in the 401(k) plan or $50,000. The loan rate is usually very low when compared with other borrowing options, which makes the 401(k) an attractive tool when needed. However, be aware of the potential consequences before doing so.

Usually the maximum time limit allowed for repaying this loan is up to five years (except if it’s for a first time home purchase, in which repayment is up to 15 years). If you are unable to repay the loan from a 401(k) plan account and your age is under 59 ½, your loan will be treated as a withdrawal, and you will be required to pay full income tax in addition to a 10% tax penalty.

If you terminate your employment, the outstanding loan is callable in full within 30 days of your termination. If you are unable to repay the loan in full, it will be reported as a taxable distribution subject to income tax and the aforementioned penalty of 10% if you are under age 59 1/2.