When you own your own business, selecting the right retirement plan is a very important decision. Not only does selecting the correct plan determine how much you will be able to invest for retirement, but it can also dramatically affect your tax situation. There are currently several options for employers including: a Savings Incentive Match Plan for Employees (SIMPLE), a Simplified Employee Pension (SEP) and a 401(k).
As part of the Pension Protection Act of 2006, a hybrid retirement plan was created. This plan is called the Defined Benefit 401(k) plan, or DB/401(k), and it became available January 1, 2010. This plan is available to employers with at least two employees but no more than 500. This is a hybrid plan, which combines a defined benefit plan based on final average pay with a safe-harbor 401(k).
The defined benefit portion of the plan is paid by the employer and must provide a benefit equal to 1% of the final average pay times years of service, up to a maximum of 20% of final pay.
For the 401(k) portion of the plan, automatic enrollment is required, and the employee must have a deferral between 3% and 10% of compensation, depending upon how many years they have participated in the plan. There are two options in calculating the employer portion of the contributions. In option one, the matching contributions for non-highly compensated employees must equal 100% of elective deferrals up to 1% of compensation plus 50% of elective deferrals of more than 1% up to 6% of compensation. Option two is more straightforward, requiring an automatic employer contribution, which must equal 3% of compensation.
The administrative part of this plan is simple requiring only one document for the plan and one annual Form 5500, which is the Annual Return for an Employee Benefit Plan. Another bonus is that employers do not have to undergo the rigorous testing procedures required for 401(k) plans.
If you are interested in finding out more information about which retirement plan would work best for your business, please feel free to contact Henssler Financial at 770-429-9166 or experts@henssler.com.
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