This Is How We Roll

One of the benefits of owning a business is that you have tax-favored options to save for retirement that non-business owners don’t have. Your business can sponsor a qualified plan which may be designed to drive the majority of the benefits to you. This is a classic way to shift business dollars to you for retirement

• Contributions to the plan are tax deductible to the business.
• Contributions are not currently taxable to the participants.
• Contributions made on behalf of employees can be paid with dollars that would have otherwise been spent on taxes.
• Earnings on contributions grow tax deferred.
• Qualified plans are protected from creditors.
• Provides a valuable benefit to employees and helps to attract and retain employees.
• Taxation of benefits are deferred until taken in the future.

Defined Contribution Plans and Defined Benefit Plans.

There are many defined contribution plan options, but they generally fall into three distinct categories – profit sharing plans being one of them. One well known profit sharing plan type is the 401(k).

The General Advantages of Profit Sharing Plans:

• Allows you to change the plan contribution each year or even decide not to make a contribution in certain years.
• You can establish eligibility requirements that employees must meet to receive a contribution.
• Can be designed to favor select employees, including you.

Within the Profit Sharing category there are a number of design options. Which profit sharing plan is best for your business?

• Traditional Profit Sharing – Everyone receives the same percentage of pay as a contribution. This plan is appropriate if only owners of the business are eligible to participate.
• Integrated Profit Sharing – Those employees earning over the Social Security wage base receive a higher percentage of the plan contribution than those earning under the Social Security wage base. This plan is appropriate if you are younger than most of your employees but earn a higher salary.
• Age-Weighted Profit Sharing – The majority of the contribution goes to those older employees who are closer to retirement. This plan is appropriate if you are older than your employees or if you want to favor older, long-time employees.
• Cross-Tested Profit Sharing – Allows you to place employees in different ‘groupings’ allowing you to allocate a higher amount of the contribution to yourself and a lower amount to employees. This plan is appropriate if you are five to ten years older than the average age of your employees.

No matter which plan type is right for you, your contributions to a profit sharing plan are always an opportunity, not an obligation. You have the flexibility to choose how much to contribute each year (within the limits placed on these plans by the tax code).

The advantages of 401(k) plans:

• Allow employees to save money for their retirement.
• Employee salary deferrals may be made pre-tax, post-tax, or a combination of both.
• Employees have flexibility in how much they contribute up to certain limits.
• Employers may choose to match some of the employees’ contributions.

Within the category of 401(k) plans, there are a number of plan options. Which 401(k) plan is best for your business?

• Traditional 401(k) – does not require you to make a matching contribution, but it could limit how much you can defer.
• Safe Harbor 401(k) – does require you to make a matching or non-elective contribution, but it will enable you to defer the maximum allowed by law. With auto enrollment, employees are automatically enrolled and must elect not to participate if they do not want to defer. Auto enrollment can help increase the participation in the plan.
• Solo 401(k) – available for businesses that do not have eligible employees. This plan allows the business owner, and key/highly compensated employees, to make elective salary deferrals as well as employer profit sharing contributions. These plans can also be combined with a Defined Benefit plan to get the maximum tax-deductible contribution allowed by law.

Non-qualified plans are plans that you can use to provide additional benefits to yourself and your key employees and executives. A non-qualified plan is often used along with a qualified plan as an additional benefit to attract and retain key employees. They also offer greater flexibility in who can be covered under the program and are generally easy to establish and administer.

You can help cover the financial loss your business would experience at the death of a key employee by insuring your key people.

KEY PERSON INSURANCE CAN BE USED TO:

• Keep lines of credit open.
• Train another employee for the same specialized skills.
• Assure the completion of ongoing project initiatives.
• Provide access to policy cash value through loans and withdrawals, which your business can use to meet unexpected business expenses*.

While you can never replace your key people, you can help protect your business from experiencing financial loss at their death.

An Executive Bonus Plan, also referred to as a Section 162 plan, allows a business to provide personally owned life insurance as a tax-deductible fringe benefit to select key employees.

If the benefit is for a non-owner employee, an executive bonus plan is appropriate for all business forms, including professional corporations, partnerships and LLC’s. However, this type of plan does not offer any tax benefit for business owners if the business is an S-Corp, partnership or LLC taxed as a partnership.

THE ADVANTAGES OF AN EXECUTIVE BONUS PLAN:

• Employer decides who participates and how much of a bonus each employee will receive.
• Bonus dollars are tax-deductible to the company as compensation to the key employee.
• Simple to adopt with No IRS approval required.
• Premiums are reported as “other compensation” on W-2 and are subject to FICA and FUTA taxes.
• The key employee will own and control the policy and will have access to the riders, potential cash value growth and death benefit that make up the permanent life insurance policy.
• The employee’s out-of-pocket cost is the tax due on the premiums paid by the employer that have been treated as compensation. You may choose to add a cash bonus to the arrangement (a double bonus) to offset the tax amount due.
• Policy cash value grows tax-deferred and may be accessed through withdrawals or policy loans*.
• Death benefit is paid to the insured’s beneficiaries income tax-free.

A Split dollar plan offers a creative solution to helping your key employee obtain needed life insurance.

Split dollar is a term that covers two different executive benefit arrangements.

• The Split Dollar Economic Benefit arrangement provides an income tax-free death benefit to the key employee while providing the business with key person protection.
• The Split Dollar Loan arrangement provides the key employee with the ownership of a permanent life insurance policy, the business with cost recovery all at a cost to the employee of the interest on the premium paid by the business.

THE ADVANTAGES OF A SPLIT DOLLAR PLAN:

• Allows your business to provide select benefits to key employees.
• Key employee receives valuable life insurance protection and potentially the benefits of owning a permanent life insurance policy.
• Business will either be the owner of the policy (the economic benefit arrangement) or will recover the costs of the arrangement (the loan arrangement).