The maximum an employer can contribute each year is 25% of an employee’s eligible compensation, up to a maximum of $270,000 for 2017. However, the contribution for any individual cannot exceed $54,000 in 2017. Employer contributions are typically discretionary and may vary from year to year. With this plan, the same formula must be used to calculate the contribution amount for all eligible employees, including any owners. Eligible employees include those who are age 21 and older and those employed (both part time and full time) for three of the last five years.
Savings Incentive Match Plan for Employees (SIMPLE). If you want a plan that encourages employees to save for retirement, a SIMPLE IRA might be appropriate for you. In order to select this plan, you must have 100 or fewer eligible employees who earned $5,000 or more in compensation in the preceding year and have no other employer-sponsored retirement plans to which contributions were made or accrued during that calendar year. There are no annual IRS fillings or complex paperwork, and employer contributions are tax deductible for your business. The plan encourages employees to save for retirement through payroll deductions; contributions are immediately 100% vested.
The maximum salary deferral limit to a SIMPLE IRA plan cannot exceed $12,500 for 2017. If an employee is age 50 or older before December 31, then an additional catch-up contribution of $3,000 is permitted. Each year the employer must decide to do either a matching contribution (the lesser of the employee’s salary deferral or 3% of the employee’s compensation) or non-matching contribution of 2% of an employee’s compensation (limited to $270,000 for 2017). All participants in the plan must be notified of the employer’s decision.
Defined benefit pension plan. This type of plan helps build savings quickly. It generally produces a much larger tax-deductible contribution for your business than a defined contribution plan; however, annual employer contributions are mandatory since each participant is promised a monthly benefit at retirement age. Since this plan is more complex to administer, the services of an enrolled actuary are required. All plan assets must be held in a pooled account, and your employees cannot direct their investments.
Certain factors affect an employer’s contribution for a plan, such as current value of the plan assets, the ages of employees, date of hire, and compensation. A participating employee with a large projected benefit and only a few years until normal retirement age generates a large contribution because there is little time to accumulate the necessary value to produce the stated benefit at retirement. The maximum annual benefit at retirement is the lesser of 100% of the employee’s compensation or $215,000 per year in 2017 (indexed for inflation).
401(k) plans. This plan may be right for your company if you want to motivate your employees to save towards retirement and give them a way to share in the firm’s profitability. 401(k) plans are best suited for companies seeking flexible contribution methods.
When choosing this plan type, keep in mind that the employee and employer have the ability to make contributions. The maximum salary deferral limit for a 401(k) plan is $18,000 for 2017. If an employee is age 50 or older before December 31, then an additional catch-up contribution of $6,000 is permitted. The maximum amount you, as the employer, can contribute is 25% of the eligible employee’s total compensation (capped at $270,000 for 2017). Individual allocations for each employee cannot exceed the lesser of 100% of compensation or $54,000 in 2017. The allocation of employer profit-sharing contributions can be skewed to favor older employees, if using age-weighted and new comparability features. Generally, IRS Forms 5500 and 5500-EZ (along with applicable schedules) must be filed each year.
Once you have reviewed your business’s goals and objectives, you should check with your Financial Advisor to evaluate the best retirement plan option for your financial situation.
ABC MA board member Jim Abbott is headed to his first ABC national board meeting in Ft. Lauderdale, FL this week, the latest step in his involvement with ABC, which stretches back more than a decade.
Jim began as ABC MA’s membership director back in 2005, and though he left that position a few years later, he’s never left ABC. He’s been a part of the National Membership Professionals Council, and our chapter’s Future Leaders group, which was formerly known as Young Leaders. His work recruiting members to ABC has earned him membership in the Beam Club.
After leaving the membership director post, Jim moved to the financial services industry. In addition to serving on the board, he assists ABC members in his role as a financial advisor at Wells Fargo Advisors.
“I help clients plan their financial futures. That includes things like setting goals and identifying each individuals’ risk tolerance.” He currently works with member companies on their 401k plans and provides comprehensive investment advice to individuals that ranges from stocks and bonds to IRAs and college savings accounts.
Jim and his wife Suzanne live in Reading with their two sons. Suzanne is also involved in the construction industry, working at the architectural firm SMRT, Inc. A former college hockey player at the University of New Hampshire, he also volunteers as a youth hockey coach.