SWC Business BriefMaking Sense ofEmployer-SponsoredRetirement Plan Options

TABLE OF CONTENTSIntroduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3Choosing the Right Retirement Plan to Offer Your Employees . . . . . . . . . . . . . . . . . . . . . 4Payroll Deduction IRA or Roth IRA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5Simplified Employee Pension (SEP) IRA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6Savings Incentive Match Plan for Employees (SIMPLE) IRA. . . . . . . . . . . . . . . . . . . . . 7Defined Contribution: Profit Sharing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8Defined Contribution: 401(k) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9Defined Benefit Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10Stees, Walker & Company, LLP (SWC)16875 W. Bernardo Drive, Ste. 290 San Diego, CA 92127p: (858) 487-4580 f: (858) 487-8033 e: [email protected] w: 2021 Stees. Walker & Company, LLP (SWC) All rights reserved. No portion of this booklet may be used without the express and written permission of Laura SteesSWC BUSINESS BRIEF2

INTRODUCTIONMaking Sense of EmployerSponsored RetirementPlan OptionsEstablishing a retirement plan for employees can payoff in big ways, and we’re not just talking about thebenefits for employees. Small business owners standto benefit as well.Small business benefits include: Retirement plans improve recruitment and retention ofbetter employees. This is especially important now thatCOVID restrictions are being lifted, and employers arestruggling to entice their best employees back intothe office. Employer contributions are tax-deductible. Assets in the plan grow tax-free. Plan options are flexible. Tax credits and other tax relief can help offset costs.Employee benefits include: Employee contributions can reduce their taxable income,lowering their taxes. Contributions and profits grow tax-free until they’rewithdrawn. Contributions can be automated through payroll deductions,making it easier to save for retirement. Through compounding interest (earning interest on savingsand interest), contributions grow faster over time.SWC BUSINESS BRIEF3

Making Sense of Employer-SponsoredRetirement Plan Options (cont’d) Retirement accounts can be carried from one employerto another. Some employees may be eligible for the saver’s credit — afederal income tax credit on top of the tax deduction alreadyallowed for contributions to a retirement account. Some plans let employees defer a portion of theircompensation into the plan, which can help employees savemoney on taxes. Employees have peace of mind knowing that they’re improvingtheir financial security for their future and retirement.Choosing the Right Retirement Plan toOffer Your EmployeesAfter deciding to offer a plan, you face the challenge of choosingwhich plan delivers the most bang for the buck — for both you (thebusiness owner) and your employees. Several options are available,which is great, but without knowing the differences, picking a plancan be so overwhelming that you put off the decision indefinitely.With that in mind, in this SWC Business Brief, we describe the mostcommon retirement plan options — from simplest to most complex— and present the key characteristics of each. As a small businessowner, you’ll want to adopt a plan that’s tailored specifically to yourbusiness objectives and your employees’ best interests.Note: Due to a recent change in tax law — made possible bythe Setting Every Community Up for Retirement EnhancementAct (SECURE Act), which was signed into law by thenPresident Donald Trump on Dec. 20, 2019 — businesses cannow treat all qualified plans adopted after the close of their taxyear (and as late as the extended due date for their tax return)as being adopted on the last day of that tax year. The extendeddeadline for establishing and funding a plan means it’s not toolate to adopt a plan and make tax-deductible contributions tothe plan that can be deducted on your 2020 corporate taxreturn — assuming your business return is on extension andyou act quickly.SWC BUSINESS BRIEF4

Making Sense of Employer-SponsoredRetirement Plan Options (cont’d)Payroll Deduction IRA or Roth IRAPayroll deduction individual retirement accounts (IRAs) are easy toset up and maintain for businesses of any size. With a traditionalIRA, contributions aren’t taxed — the money is taxed only whenit’s withdrawn from the account. A Roth IRA is the opposite —contributions are made with income that has already been taxed,and money isn’t taxed when it’s withdrawn.Key advantage: Easy to set up and maintain.Eligible employers: Any business may set up a payrolldedication IRA.Employer’s responsibilities: You simply need to arrange foremployees to make payroll deduction contributions and thentransmit contributions to the employees’ IRAs at each pay period.Best of all, there’s annual filing requirement.Plan contributors: Employee contributions are made throughpayroll deductions. Employer contributions are not allowed withpayroll deduction IRAs or Roth IRAs.IRAorRoth IRAContributor’s options: Employee decides how much to contributeat any time.Maximum annual contribution (2021): Employees can contributethe lesser of the employee’s compensation or 6,000 annually( 7,000 if age 50 or older). Roth IRA contributions are not allowedif the employee’s annual income exceeds 140,000 ( 208,000for married couples filing ajoint return).Minimum employee coverage requirements: No requirement.This is merely a convenience that can be offered to any or allemployees.Withdrawals, loans, and payments: Withdrawals are permitted atany time but they are subject to federal income tax and a possible10 percent penalty if the participant is under the age of 59½.Loans from the IRA are not allowed.Vesting: Immediate 100 percent vesting.SWC BUSINESS BRIEF5

Making Sense of Employer-SponsoredRetirement Plan Options (cont’d)Simplified Employee Pension (SEP) IRAA SEP-IRA (simplified employee pension individual retirementaccount) is a variation of a traditional IRA. Employees can receiveemployer contributions to their SEP-IRA and make regularcontributions (outside the SEP-IRA) to a traditional or Roth IRA.Key advantage: Simplified employee pension IRAs are easy to setup and maintain.Eligible employers: Any business may establish one.Employer’s responsibilities: Your responsibility is discussed andagreed to when you set up plan by completing IRS Form 5305SEP. And there’s no annual filing requirement.Plan contributors: Employer contributions only. Employees areprohibited from contributing to a SEP.Contributor’s options: You can decide whether to makecontributions year to year.SEPIRAMaximum annual contribution (2021): You can contribute thelesser of 25 percent of employee’s compensation or 58,000annually. Again, employees are prohibited from contributingto a SEP.Minimum employee coverage requirements: Must be offeredto all employees who are at least 21 years of age, employedby the business for three of the last five years, and who havecompensation of at least 650 during 2021.Withdrawals, loans, and payments: Withdrawals are permittedat any time and are subject to federal income tax and possiblepenalty. Employees under the age of 59½ may be subject to a 25percent penalty if funds are withdrawn within the first two yearsof participation and a 10 percent penalty if withdrawn afterwards.Loans from an SEP are not permitted.Vesting: 100 percent vested immediately.SWC BUSINESS BRIEF6

Making Sense of Employer-SponsoredRetirement Plan Options (cont’d)Savings Incentive Match Plan for Employees (SIMPLE) IRAA SIMPLE IRA plan (Savings Incentive Match Plan for EmployeesIRA) allows employees and employers to contribute to traditionalIRAs set up for employees. It is ideally suited as a start-up retirementsavings plan for small business owners not currently sponsoring aretirement plan.Key advantage: With the SIMPLE IRA, salary reduction is handledwith little administrative paperwork.Eligible employers: Any business with 100 or fewer employeesthat doesn’t currently maintain any other retirement plan.Employer’s responsibility: You set up the plan by completingIRS Form 5304-SIMPLE or 5305-SIMPLE. No annual filingrequirement. And best of all — your bank or financial institutiondoes most of the paperwork.Plan contributors: Both the employee and small business makecontributions to a SIMPLE IRA — employee contributions arehandled through salary reduction contributions, and yours arehandled as employer contributions.SIMPLEIRAContributor’s options: The employee decides how muchto contribute. You as the employer must make matchingcontributions or contribute 2 percent of the employee’scompensation up to the set maximum (see below formaximum amounts).Maximum annual contribution (2021): Employee deferrals arelimited to the lesser of 100 percent of their compensation or 13,500 ( 16,500 if age 50 or older). Employers can eitheroffer a 100 percent match of deferrals on up to 3 percent ofcompensation or 2 percent nonelective contribution on up to 290,000 of compensation (max of 5,800).Minimum employee coverage requirements: If you offer aSIMPLE IRA, it must be offered to all employees who havecompensation of at least 5,000 in any previous two years andwho are reasonably expected to earn at least 5,000 in thecurrent year.Withdrawals, loans, and payments: Withdrawals from a SIMPLEIRA are permitted at any time but are subject to federal incomeSWC BUSINESS BRIEF7

Making Sense of Employer-SponsoredRetirement Plan Options (cont’d)tax and, if the employee is under the age of 59½, may be subjectto a 25 percent penalty if taken within the first two years ofparticipation, and a 10 percent penalty if taken afterwards. Loansfrom SIMPLE IRAs are prohibited.Vesting: 100 percent vested immediately.Defined Contribution: Profit SharingWith a profit-sharing plan, you (the employer) can contribute anyamount at any time, regardless of whether the business has aprofitable year. If you do make contributions, you will need to havea set formula for determining how the contributions are divided.And with a profit-sharing plan, money from the business goes into aseparate account for each employee.Key advantage: Profit-sharing plans allow you — the employer —to make large contributions for employees.Eligible employers: Any business may participate in a profitsharing plan.Employer’s responsibility: The IRS has no established model tofollow. Advice from a financial institution on setting up a profitsharing plan, or from an employee benefit advisor, is necessary.Annual filing of IRS Form 5500 Series return — an importantcompliance, research, and disclosure tool for the U.S. Departmentof Labor — is required.ProfitSharingPlan contributors: Employers are the only contributors to profitsharing plans. Employees may not make contributions of their own.Contributor’s options: While employers make contributions as setby plan terms, those contributions can be redetermined each yearif the profit-sharing plan provides for doing so.Maximum annual contribution (2021): The lesser of 100 percentof your employees’ compensation or 58,000 annually is allowed.Amounts that don’t exceed 25 percent of aggregate compensationfor all participants can be deducted.Minimum employee coverage requirements: Generally, if offered,a profit-sharing must be available to all employees at least 21years of age who worked at least 1,000 hours in a previous year.Withdrawals, loans, and payments: Profit-sharing plans maySWC BUSINESS BRIEF8

Making Sense of Employer-SponsoredRetirement Plan Options (cont’d)permit loans and hardship withdrawals. Those withdrawals aresubject to federal income tax and may be subject to a 10 percentpenalty if the participant is under the age of 59½. Benefits aregenerally paid at retirement.Vesting: May vest over time according to the plan’s terms.Defined Contribution: 401(k)When offered by a business, a 401(k) is a feature of a qualified profitsharing plan that allows employees to contribute a portion of theirwages to individual accounts.Key advantage: With a 401(k), employees are permitted tocontribute more than other options. And 401(k) contributions maybe combined with an employer profit-sharing plan. Safe harbor(i.e., employer contributions are fully vested when made) andautomatic enrollment options are available.Eligible employers: Any business may offer a 401(k).Employer’s responsibility: The IRS has no established modelto follow. Advice from a financial institution or employee benefitadvisor is not only recommended — it’s necessary. Annual filing ofIRS Form 5500 Series return is required. You may also be requiredto submit to nondiscrimination testing unless you — the ownerand/or your spouse — is the only employee, or a safe harbor planis used.401(k)Plan contributors: Employees participate through salary reductioncontributions, while employers may contribute as well.Contributor’s options: The employee decides how muchcompensation to defer to their 401(k) up to a maximum amountset by plan. The business can make additional contributions,including matching, as set by the plan. For safe harbor plans,the employer must make specified matching contributions or a 3percent contribution to all participants.Maximum annual contribution (2021): Employees have a deferrallimit of 19,500 ( 26,000 if age 50 or older). The employer/employee combined contribution limit is the lesser of 100 percentof employee’s compensation or 58,000 (increased to 64,500if the employee is age 50 or older and to the extent an employeecatch-up deferral is made).SWC BUSINESS BRIEF9

Making Sense of Employer-SponsoredRetirement Plan Options (cont’d)Minimum employee coverage requirements: Generally, the 401(k)must be offered to all employees at least 21 years of age whoworked at least 1,000 hours in a previous year. Check with yourcompany’s benefits advisor to ensure you’re compliant.Withdrawals, loans, and payments: Employee withdraws arepermitted after a specified event occurs (such as reaching theage of 59½, death, or separation from service). And dependingon how the plan is set up, it may permit loans and hardshipwithdrawals. Keep in mind, however, that any withdrawals arelikely subject to federal income tax and may be subject to a 10percent penalty if participant is under the age of 59½. Benefitsare generally paid at retirement.Vesting: Employee contributions are 100 percent vestedimmediately. Employer contributions may vest over time accordingto the 401(k) plan’s terms.Defined Benefit PlanDefined benefit plans provide a fixed, pre-established benefit foremployees at retirement. Small businesses can generally contribute(and therefore deduct) more each year than in defined contributionplans such as profit-sharing plans and 401(k) plans. However,defined benefit plans are often more complex and, thus, more costlyto establish and maintain than other types of plans.Key advantage: Defined benefit plans permit employers tocontribute more than other plans and provide a fixed, preestablished benefit for employees.Eligible employers: Any business may offer a definedbenefit plan.DefinedBenefitPlanEmployer’s responsibility: The IRS has no established model tofollow. As a result, advice from a financial institution or employeebenefit advisor is necessary. You’ll also need to annually filean IRS Form 5500 series return. And, an actuary — a businessprofessional who deals with the measurement and managementof risk and uncertainty — must determine your company’s annualfunding obligation.Plan contributors: Primarily the employer, but a defined benefitplan may also require or permit employee contributions. It alldepends on the plan’s terms.SWC BUSINESS BRIEF10

Making Sense of Employer-SponsoredRetirement Plan Options (cont’d)Contributor’s options: You — the employer — makescontributions as set by the plan’s terms. Contributions are usuallyrequired each year.Maximum annual contribution (2021): The employer’scontribution is established in the terms of the plan, and theemployer may permit or require employee contribution.Minimum employee coverage requirements: Generally, must beoffered to all employees at least 21 years of age who worked atleast 1,000 hours in a previous year.Withdrawals, loans, and payments: Payment of benefits is madeafter a specified event, generally at retirement. May permit loansand early withdrawals subject to a 10 percent penalty if participantis under the age of 59½.Vesting: May vest over time according to plan terms.Deciding on which retirement plan is the best fit for your businessand employees can often be confusing because of all the choicesavailable and concern about the costs and complexities of eachoption. If you can’t decide which plan is best or how to get started, thefinancial strategy professionals here at SWC can help. We’ll meet withyou, ask pertinent questions, examine your business, and help youchoose a plan that has the cost-to-benefits ratio you’re aiming for.Don’t wait to start exploring your options. Act as soon as possible,so you can start using a retirement plan to strengthen yourbusiness while maximizing tax savings and helping to build arespectable retirement nest egg for yourself andyour employees.Disclaimer: The information in this SWC Business Brief about starting aretirement plan for employees is provided for general informational purposesonly and may not reflect current financial thinking or practices. No informationcontained in this business brief should be construed as financial advice fromthe staff at Stees, Walker & Company, LLP (SWC), nor is this the informationcontained in this business brief intended to be a substitute for financial counselon any subject matter or intended to take the place of hiring a Certified PublicAccountant in your jurisdiction. No reader of this business brief should act orrefrain from acting based on any information included in, or accessible through,this business brief without seeking the appropriate financial planning adviceon the particular facts and circumstances at issue from a licensed financialprofessional in the recipient’s state, country or other appropriate licensingjurisdiction.SWC BUSINESS BRIEF11

A SEP-IRA (simpliied employee pension individual retirement account) is a variation of a traditional IRA. Employees can receive employer contributions to their SEP-IRA and make regular contributions (outside the SEP-IRA) to a traditional or Roth IRA. . IRS Form 5304-SIMPLE or 5305-SIMPLE. No annual iling requirement. And best of all — your .