If there’s one topic that weighs on business owners’ minds, it’s retirement plans – their own and those of their employees.
Retirement plans are a complex, yet vital part of your clients’ organizations. One of the biggest challenges is navigating all the rules, regulations and considerations needed to remain in compliance. Here are a few tips to help business owners not only meet their plan obligations, but also realize some benefits for their employees and themselves.
Know your limitations – for the cost of living amounts, that is
To ensure that life after retirement is not only manageable, but enjoyable, it pays to be aware of how much individuals can annually set aside for the future. In October the IRS released the new cost of living adjusted amounts for 2015:
- The salary deferral contribution limit is increased to $18,000;
- The “catch-up” contribution limit, for those age 50 and older, is increased to $6,000;
- The annual compensation limit is $265,000;
- The Highly Compensated Employee (HCE) annual compensation limit is $120,000; and
- The maximum annual addition limit (the maximum allocation) is $53,000, $59,000 for anyone age 50 and older.
Understanding and applying these new limits could help your clients and their employees save more for retirement.
Automatic 401(k) enrollment, safe harbors and QACAs: good for employees and their employers
Americans are living longer than ever and most don’t have enough saved for retirement. Consider an automatic enrollment feature for your 401(k) plan. The feature enrolls newly eligible employees at a default contribution percentage if they do not take action to enroll or decline participation in the plan on their own. The default percentages generally range from 3% to 6% of compensation. Plans can also include an auto escalation feature that further increases the contribution percentage by a set amount each year, generally by 1% of compensation.
Most employees agree they should be saving for retirement, but never seem to get around to signing up for their company’s plan. But with auto enrollment, the “stick” rate — the percentage of employees who do not opt out once automatically enrolled — is higher than most would expect because employees don’t make the effort to opt out. Many acknowledge the need to save and appreciate the nudge in the right direction.
An automatic enrollment feature will also help improve Actual Deferral Percentage (ADP) test results for the companies that sponsor these plans. The ADP test looks at the relationship of contributions by HCEs and non-HCEs. Poor non-HCE plan participation will limit the ability of HCEs to make salary deferral contributions under the plan.
For companies who want to avoid the possibility of ADP test failures and the related refund of contributions for HCEs, consider a safe harbor arrangement or a Qualified Automatic Contribution Arrangement (QACA). These are special types of 401(k) plan arrangements that are not subject to ADP testing, but each has different features.
Safe harbor arrangements require:
- Employee notification of the intent to be a safe harbor plan;
- A mandatory employer matching contribution (100% of the first 3% of pay contributed plus 50% of the next 2% of pay contributed) or a mandatory 3% of pay non-elective contribution for everyone eligible to participate in the plan; and
- The employer safe harbor contribution must immediately vest.
- Employee notification of the intent to be a QACA;
- Automatic enrollment at a minimum of 3% of pay increasing each year by 1% of pay not to exceed 10% of pay;
- A mandatory employer matching contribution (100% of the first 1% of pay contributed plus 50% of the next 5% of pay contributed) or a mandatory 3% of pay non-elective contribution for everyone eligible to participate in the plan; and
- The mandatory QACA employer contributions may vest over a two-year period.
Discretionary profit sharing contributions are permitted under both arrangements. Profit sharing contributions can be used to help plan participants reach the $53,000 annual addition limit ($59,000 if age 50 or older). Profit sharing contributions can also be subject to a six-year vesting schedule to help retain valuable employees and protect the contributing employer.
The IRS requires all retirement plans to be periodically amended and restated to comply with recent tax law changes. Defined contribution plan sponsors of a prototype document must perform these updates on a six-year cycle. The most current six-year cycle is now open, and all plans in this category must be amended and restated by April of 2016. Those who fail to amend and restate may jeopardize the tax-qualified status of their plan.
Work with experts to avoid complications
The right retirement plan can be a tool for employee recruitment and retention, as well as owner and executive wealth protection. At Clark Schaefer Hackett, we have decades of experience working closely with your clients’ plan sponsors across a wide range of industries. We’ve helped administer quality benefits plans, advised on related topics, and offered crucial guidance to correct mistakes and preserve their tax-favorable status. Contact us today to see how we can help your clients and their employees take advantage of all the benefits of a well-run plan.
Further resources for understanding employee benefits: