Stand out from the pack
With a tightening job market, can a 401(k) and its iterations keep you competitive?
In a candidate-driven job market, competitive retirement plans continue to be in high demand. You may know quite a bit about 401(k) profit-sharing plans specifically, but their iterations – the solopreneur or one-person plan, the safe harbor plan and the SIMPLE plan – could give your business a leg up as well. Let’s dig in.
The 401(k) plan
The 401(k) is the bedrock of retirement planning. Simply put, this is a profit-sharing retirement plan that allows employees to make elective salary deferrals and avoid present-day taxes on that portion of their income. Most employers, including not-for-profit organizations, can offer a 401(k) plan to their employees. The exception here is any government entity.
In addition, the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) allowed employees to add qualified Roth contributions to their 401(k) plans; however, the Roth 401(k) contributions only apply to employees’ elective salary deferrals. And since it is a Roth vehicle, the contributions are after-tax, not pre-tax like the typical 401(k).
- Pre- and post-tax contribution options for the opportunity to put more into their retirement savings
- Automatic payroll deduction supercharges retirement savings
- Saver’s credits are available for low and moderate income workers that can help offset part of the first $2,000 they contribute
- Not required to make contributions to employee accounts
- May be eligible for a $500 annual business tax credit in the first three years of the plan
The solopreneur or one-person 401(k) plan
This retirement savings plan can work well for individuals who are sole operators of their businesses. It can also work for those who share ownership and responsibility with family members or with partners, with the caveat being that those individuals must each own at least 5% of the business. The owners-only 401(k) is available to business entities including sole proprietorships and partnerships, as well as C, S and limited liability corporations.
- Can contribute very high amounts of income from either profit or compensation – totaling up to $58,000 in 2021 plus a catch-up contribution of $6,500 if you are 50 or over
- Ability to choose your tax benefit: deferred or immediate
- Your spouse can be included if they receive income from your business, effectively doubling your contribution
Safe harbor 401(k) plan
A safe harbor 401(k) plan is similar to a traditional 401(k). But it has one key benefit: low employee participation doesn’t keep the business owner from achieving the maximum pre-tax payroll deferral limit. But do note that the company must be willing to make contributions on behalf of its employees.
- If you own your business, you don’t have to worry about your contributions being capped by ADP testing if you are highly compensated
- For a small company having to make mandatory contributions, implementing this plan could be less expensive than nondiscrimination testing
- Less expensive to set up than traditional plans
- Same benefits as a traditional 401(k), plus contributions are vested immediately
A Savings Incentive Match Plan for Employees of Small Employers (SIMPLE) plan
A SIMPLE plan provides for elective salary reduction contributions (deferrals) by eligible employees up to $13,500 for 2021 (or 100% of compensation, whichever is less). The plan also requires a mandatory contribution by the employer that is either a dollar-for-dollar match of up to 3% of compensation (can go as low as 1% in two out of five rolling calendar years) or a nonelective amount of 2% to eligible employees, whether an employee participates in the plan or not. The employer cannot make any additional contributions and may not sponsor any other retirement plan in conjunction with a SIMPLE plan.
For what may be considered a tradeoff to this mandatory contribution, the good news is that there are minimal tax filing requirements, no nondiscrimination tests and no top-heavy contributions required by the employer. These provisions allow any employee, including a highly compensated one, to defer up to $13,500 (2021) without any consideration to any deferrals made by other employees.
Catch-up contributions are allowed in SIMPLE plans for qualified individuals. The contribution is in addition to the regular salary reduction contribution and the match or nonelective contribution. This additional contribution is $3,000 for 2021 and will be indexed for inflation thereafter.
- You can offer a SIMPLE IRA or 401(k)
- There is no annual filing of Form 5500 and so none of the associated costs of staff time, administrative burden or payroll technology required to do so
- Pre-tax contributions are 100% deductible for the business
How to choose?
Choosing a plan requires a careful look at your current plan if you have one, your employee demographics, overall company goals –growth, retaining talent or otherwise – and at how each plan aligns with those.
Your advisor can help guide you through the pros and cons of each and connect you with specialized fiduciaries who can oversee any administrative and legal responsibilities involved.
- Evaluate current plans for you and your employees – are these competitive with the market?
- Identify areas where potential tax benefits could help grow your business.
- Reach out to your advisor to make sense of the options available.
401(k) plans are long-term retirement savings vehicles. Withdrawal of pre-tax contributions and/or earnings will be subject to ordinary income tax and, if taken prior to age 59 1/2, may be subject to a 10% federal tax penalty.
Investors should consider their personal investment horizon and income tax brackets, both current and anticipated, when making an investment decision, as these may further impact the results of the comparisons. Keep in mind that results will vary as investing involves risk, fluctuating returns and the possibility of loss.
Sources: humaninterest.com; employeefiduciary.com; nerdwallet.com; money.usnews.com
Pop the cork!
A virtual wine tasting is the perfect holiday event – for clients and employees alike
As we wind down 2021, uncertainty makes holiday event planning for clients and employees a little more challenging. But there is a delightful workaround that more and more people have been partaking in: The virtual wine tasting. Sampling wine and enjoying some snacks, as well as camaraderie, can end the year on a high note.
Set it up
The setup is relatively easy. First, a guest list with four to 10 people is ideal. Then, choose a day, time and your preferred platform, like Zoom or Google Hangout.
Choose a theme
According to master sommelier Lu Yang, “Have a theme in mind – you can make it a vertical tasting from the same producer, or a horizontal (same vintage) range from a certain region. A theme is also important to keep people focused. By the end of the tasting, your guests are more likely to have a sense of accomplishment if you’ve had thorough discussions around one topic.”
Make the selection
Select three or four bottles in your theme and send them to the invitees ahead of time, to arrive the same day so everyone will have them by the event date. Wine.com will actually deliver to your home and send duplicate orders to the clients or employees you are inviting. Wine-searcher.com is a comprehensive resource for selecting wines and compiling tasting notes.
Who’s the host?
Dazzle clients by bringing in an outside expert or sommelier to host — consider either handing off to an external company who organizes it all for you or partnering with a local restaurant. Supporting a local business where your company is located can add a feel-good vibe and give back to your community.
If it’s an internal or employee event, consider asking multiple staff members to join in, perhaps to each “host” a wine. Each host can consult a resource like wine-searcher.com for information about “their” wine. Make a few notes or even a short PowerPoint deck with the history of each vintage and why you chose it. In advance of the tasting, consider sending palate-cleansing crackers or other snacks that pair well, as well as a suite of glassware that attendees can keep as a holiday gift.
Outsource the fun
To elevate the experience for clients, there are tons of options that will do it all for you. Napa-based wine club Priority Wine Pass offers knowledgeable hosts, world-class wines and a fun online format. They can help you choose a winery and specific wines, coordinate shipping, schedule your tasting, provide a Zoom link, and invite a knowledgeable winemaker or winery owner to emcee your event.
- Consider a guest list – will this be an employee or client holiday event?
- Identify a budget and decide if you want to DIY or outsource the event.
- Consider nonalcoholic options as well.
Sources: eventbrite.com; eventmanagerblog.com; forbes.com; forbes.com; voluptuarywine.com; wine-searcher.com; prioritywinepass.com; liquor.com; thespruceeats.com
Five financial resolutions to guide your business
Embrace eco-conscious energy savings – Something as simple as subbing LED bulbs for incandescent ones can mean hundreds of dollars in cost savings for your office. Consider how “green-ifying” your business can add regular cost savings to your bottom line and attract talent. Reinvesting those savings into salaries, inventory or new equipment can drive growth year over year. You can also become an Energy Star partner through the Environmental Protection Agency (EPA) and reap the marketing benefits and branding of the program. The EPA website offers workbooks, training and partner information to get started.
Explore a strategic partnership – Strategic partnerships can help grow your company – without having to buy and integrate another business. Large corporations use strategic partnerships when they want to scale quickly, and so can you. First identify your assets – do you have access to a specific customer base? Do you have special talent on your team or proprietary systems or processes? Do you have a giant email list? Then identify where or how you want to grow. Do you need to reach a different customer segment? A new geographical region? Research companies that might need what you have to offer and would allow you to penetrate new markets. And take stock of what you could offer in a partnership. Typically, these exchanges are codified in a formal agreement, without any out-of-pocket investments.
Upgrade your technology – The surge in financial technology and cloud computing makes it possible to automate everything from forecasting cash flow to ordering raw materials. Invoicing, budgeting, streamlining HR processes, tracking goods, inventory and purchasing are just some of the areas that can benefit from an upgrade in technology in every business. Talk to your advisor about setting aside funds to invest in technology that can contribute to cost savings, increased employee productivity and more.
Pursue flexible funding – As a business owner, preparing for the unexpected comes with the territory. Juggling changing pricing for goods and services, managing inventory, and monitoring cash flow carefully are all crucial to drive success. Flexible financing can give you access to liquidity when you need it, without incurring high-interest debt or leaving you without options when cash flow hits a snag. These lines of credit give you access to a set amount of funds you can draw from, repay and dip into again whenever the need arises. You’ll pay interest only on the funds you use. This could be a smart way to ensure funds are available exactly when you need them –
should an emergency or opportunity arise.
Benchmark benefits packages – Competition for talent has become fiercer than ever. Doing an annual audit of benefits and presenting the dollar worth of each to employees can go a long way to retaining talent you have. Benchmark what you offer against five of your peers to further strengthen your benefits package, come up with new ideas to enhance your offerings and be sure your benefits package is in line with market trends.
- Reach out to your advisor to explore what different financing options could mean for your business.
- Research businesses that complement yours to explore a strategic partnership.
- Consider where technology upgrades would make a difference in your business.
Sources: energystar.gov; fundbox.com; forbes.com; sba.gov; forwardai.com; bizjournals.com