Building a Retirement Program
for Business
Presented by
(Name, CPA)
Member, The Ohio Society of CPAs
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Types of Retirement Plans
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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 Plan
To 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) Plans
Two 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
contributions
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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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