Retention levels higher for employers with defined benefit plans.

President George W. Bush signs into law H.R. 4...
President George W. Bush signs into law H.R. 4, the Pension Protection Act of 2006, Thursday, Aug. 17, 2006. Joining him onstage in the Eisenhower Executive Office Building are, from left: Secretary of Labor Elaine Chao; Rep. Buck McKeon of California; Rep. John Boehner of Ohio; Senator Blanche Lincoln, D-Ark.; Senator Michael Enzi, R-Wyo., and Rep. Bill Thomas of California. (Photo credit: Wikipedia)

Many employers are looking for benefits to attract and retain talented employees, while increasing their own deductible contributions. The hybrid defined benefit/defined contribution plan may be the answer. Changes to retirement plans in the Pension Protection Act of 2006 make this option very attractive for many small business owners and professional firms.

“Employers that provide DC-only retirement plans recognize they need to increase employee engagement with their plans in order to improve their employees’ retirement readiness. Effective DC retirement plans require that workers understand and take full advantage of them, which is why organizations are moving beyond merely making these benefits available,” says Mike Archer, senior retirement consultant at Towers Watson.Other key findings from the survey include:

• Hybrid plans, primarily cash balance plans that combine features of 401(k) plans and traditional pension plans, are now the most prevalent type of DB plan for new hires. More than half (54%) of DB plans are hybrid plans, while 46% are traditional plans.

• Over three-fourths (78%) of DB plan sponsors for new hires believe employees value the guaranteed benefits from pensions more than other features, compared with only 50% of DC-only sponsors.

• Additionally, 54% of DB sponsors for new hires believe employees value income throughout retirement, while only 28% of DC-only sponsors do. Other Towers Watson research shows a growing number of employees are willing to pay more from each paycheck to ensure a guaranteed retirement benefit.

To attract and retain talented employees, employers will need to offer excellent employee benefits. There are numerous options for employers to improve their retirement plan options.

Please comment or call to discuss what these options are and will they work for your firm.

Posted via email from Curated 401k Plan Content

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Younger Workers Look for Employers with DB Plans

There are plan designs available for successful small business owners and professional service firms to add a hybrid defined benefit plan and attract and retain talented employees. These plan designs have become a viable solution by provisions in the Pension Protection Act of 2006. This plan design does not work for all companies however when it does work it is very attractive.

President George W. Bush signs into law H.R. 4...
President George W. Bush signs into law H.R. 4, the Pension Protection Act of 2006, Thursday, Aug. 17, 2006. Joining him onstage in the Eisenhower Executive Office Building are, from left: Secretary of Labor Elaine Chao; Rep. Buck McKeon of California; Rep. John Boehner of Ohio; Senator Blanche Lincoln, D-Ark.; Senator Michael Enzi, R-Wyo., and Rep. Bill Thomas of California. (Photo credit: Wikipedia)

The survey found that the number of DB plan participants hired within the last two years who said the retirement program was an important factor in deciding to join their employer jumped from 27% in 2009 to 70% in 2011. At employers with DB plans, employees hired within the past two to five years were more than 3.5 times as likely to say their retirement program strongly affected their employer choice decision (67% versus 18%). Meanwhile, retirement programs have become only slightly better attraction tools at companies with only a DC plan. Of this group, 19% of employees hired over the same time span reported that the retirement program was an important reason for their employer choice.Many more workers who accept a job that offers a DB plan intend on a long career with their employer. More than three-fourths (77%) of new hires at companies with a DB plan say the retirement plan gives them an important reason to stay on the job, and 85% hope to work for their employer until retirement.

For companies to remain competitive for younger, talented employees they must listen to what these prospective employees are looking for. There are plan designs available to accommodate a defined benefit plan for smaller employers.

Please comment or call to discuss what options are available for your company.

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Tax Organization Tips for Small Businesses

If tax season were like Christmas, you’d definitely file doing your taxes under “last-minute shopping.”  Not only is it time to prepare last year’s taxes, but it’s also important to get this year’s taxes rolling as well.  Compiling tax data last minute can be stressful and confusing.  And trying to throw together important information regarding the success of your business under pressure will surely lead to costly mistakes.  Here’s a list of helpful organization tools that can cut your tax preparation time in half:

  • Don’t store all your tax records in one file.  Keeping your tax records all in one place can lead to lost items and mismanagement.  Try purchasing organizational containers like plastic tubs and label them with the tax year.  Items like vendor files, appointment books, bank records Insurance policies, capital asset files, investment accounts, real estate and capital improvement files are important tax documents that need to be filed together under the same tax year.
  • Track your mileage.  If you use your vehicle or cell phone for business you’ll want to track your usage accordingly.  While cell phones can be easily archived through your bill, your vehicle is different.  The IRS asks for your total mileage on the tax return, so try keeping a notebook in your vehicle and tracking your mileage for each trip.
  • Collect all of last year’s tax documents.  If you haven’t done this yet, create income tax files for last year and this year – and make them stand out.  Throughout the year as taxable transactions occur, collect all documents in the file.  Filing documents like third-party reporting documents such as 1099s, K-1s, W2s, 1098s, etc., and receipts for tax deductable transactions immediately when you receive them will make data compilation much easier.  After archiving these throughout the year you can simply grab the file, a back up of your QuickBooks data, and head out to your tax pro.
  • Go green!  Welcome to the 21st century!  Now welcome your bookkeeping system as well, and purchase up-to-date digital accounting software.  Most accounting software programs are easy enough for the non-accounting professional to use.  Now tax return preparation, financial and tax planning are simplified because of the comprehensive reports generated by a decent accounting program.  Imagine not having to peruse through your filing cabinet for hours at a time, and simply pulling it up on your computer instead.  Furthermore, these digital files are easily transferable and take up less space.  Although, beware of the caveat – computer crashes are not uncommon, and losing all your important files in a “virtual fire” can ruin you and your business.  Be sure to implement a routine backup plan where the files can be stored outside of your hard drive.

There are myriad tips that can help you and your business organize your taxes throughout the year, making last-minute tax preparation less of a headache.  If you have tips of your own that you’d like to share please let us know!

Photo courtesy of: http://helpfreetheearth.com
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Small business owners are unprepared for retirement

A disciplined savings and investing strategy is much easier than most small business owners believe. By installing a retirement plan for themselves and their employees they will save in taxes and help their employees. The benefit to employees will result in increased loyalty and satisfaction.

WASHINGTON - NOVEMBER 18:  (L-R) Federal Depos...
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“The lack of retirement planning by so many people is stunning, especially since business owners have no one else to rely on when it comes to putting their retirement plans in place,” says Mary Quist-Newins, director of the State Farm Center for Women and Financial Services at The American College. “When you consider that the mean age of our respondents is just over 50 you have to wonder, ‘What are these individuals waiting for?’ Retirement will be upon them before they know it. Small businessowners need to start preparing for retirement now.”Even for the small business owners who have calculated their retirement goals, most do not have a formal plan to achieve their financial objectives. Among the small business owners surveyed, 77% of the women and 74% of the men have no written plan for retirement.

Small business owners are far too busy running their business to take the time to properly plan and execute a strategy to successfully retire. Many wait until three years or less before retirement to plan. Others believe they will sell their business to fund their retirement. This lack of planning forces many to make decisions they would not ordinarily do.

Please comment or call to discuss what it takes to begin a retirement plan.

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How to determine if a cash balance pension plan is right for your company

PensionRetirement plan design is vital to the success of very plan. The cash balance plan should be considered by professional service firms, closely held small businesses, and any firm with solid cash flowlooking for additional tax deductions. This plan design will help attract and retain top talent.

Companies that have maxed out their 401(k) plans but still have discretionary incomeand steady cash flow available for retirement benefits may want to consider a cash balance pension plan.“A cash balance pension plan is technically a defined benefit pension plan which has features that resemble a defined contribution plan,” explains Tom Sigmund, firm director and chair of the Employee Benefits & ERISA practice at Kegler, Brown, Hill & Ritter. “Like a traditional defined benefit pension plan, the employer bears all responsibility for funding and investing, and the value of the assets do not impact the promised benefit. However, the benefits are depicted as an account balance.”

Sigmund says that a cash balance pension plan is an especially popular tool for professional practices.

“If they have not maxed out their 401(k) plan, we recommend that they do so prior to establishing the cash balance pension plan. In combination, these two plans can enable the organization to cost effectively meet a variety of goals relative to the principles of the practice.”

The cash balance plan design is best suited for organizations will strong steady cash flow. Not only will be able to deduct significantly more, it will help you attract and retain talented employees.

Please comment or call to discuss how this would help you firm.

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Tax Credit for Starting a New Employer Retirement Plan

SR&ED Investment Tax Credits
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Section 45E of the tax code permits an eligible small employer to claim a tax credit versus a deduction for qualified startup costs and plan administration fees.  The credit is 50 percent of the relevant expenses and is limited to $500 per year for the first credit year and each of the following 2 tax years.  The credit is currently set to expire at the end of 2012; however, it has previously been extended.

For example, if such an employer paid $1,200 in fees to establish a new plan in 2011, and then paid $800 in plan administration fees in 2012, the allowable tax credit would be $500 in 2011 and $400 in 2012.  Thus, the real cost to establish the plan is reduced from $1,200 to $700 because of the $500 tax credit.

An eligible small employer is one who had no more than 100 employees during the tax year preceding the first credit year and only employees who were paid more than $5,000 during that tax year are counted.  Further, as the credit is intended to spur the adoption of new plans, if an otherwise eligible employer established or maintained a plan during the 3 tax years preceding the first credit year, they are not eligible to claim the credit.

Get’em before there gone!

Please comment or call to discuss if this is right for your company.

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The Small Business 401(k) is the Holiday Gift That Keeps on Giving

Eagle with flag in background.
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Business owners understand that they cannot rely on the government for their retirement. A 401(k) plan can not only help them save for their retirement but also help attract and retain talented employees.

The Benefit That Keeps on Giving and Can Pay for Itself

There’s no doubt about it, giving each of your employees a fat check around the holidays would feel great. But, in the long-term, giving them free money every two weeks — via matching contributions to their 401(k) — can actually work out even better for both you and your employees.  And, for smaller firms, the plan may actually pay for itself outright.

Here’s how 401(k) saving and tax advantages can really add-up.  Consider a scenario of two businesses. Each has seven employees including the owner, and the owner earns $150,000 a year.  One offers a 401(k) plan with a “safe harbor” match to maximize her contributions and one does not provide a retirement plan at all.

So which owner keeps more of her money? In this situation, the owner with the 401(k) is much better off than the owner without a plan.  The owner with a 401(k):

  • Keeps  $2,729 more of her own money
  • Pays $7,465 less in personal and business  taxes
  • Saves $22,087 in tax-deferred income for retirement

That’s just year one. Take a ten year view, and the numbers get even more exciting.  The owner saves nearly $75,000 in taxes and builds a nest egg $305,000 assuming a seven percent annual return over the period.  Tax credits, deductions of any match and plan expenses, and matching can all have powerful effects on your bottom line.

Small business 401(k)s are in everyone’s best interest and bottom line. Now that’s a concept that even Scrooge could love.

There is a human tendency to believe when times are good they will always be good. And when times are bad they will always be bad. This is not the case, the economy and the world will get better. Now is the time to begin a retirement plan for yourself and your employees. It will pay dividends for you very soon.

Please comment or call to discuss how this affects you.

  • Your Employees Appreciate Your Company’s 401(k) Plan (401kplanadvisors.com)
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The Value of Tax Deferral

 

History of top marginal income tax rates in th...
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Tax deferred account / qualified plan

Contributing your $3,000 to a 401(k) or other qualified plan, you have the whole amount to invest and investment earnings are tax free – but you have to pay tax when you withdraw it.  Leaving it in for, say, 20 years you would have $6,414 after paying your tax:  $3,000 x (1.06 ^ 20) x (1-.3333).

Taxable account

Contributing to a taxable account, you have $2,000 to invest after tax ($3,000 x (1-.3333)) and investment earnings are taxable so your effective investment return is 4% (6% x (1-.3333)).  But then you’re done paying taxes.  After 20 years you would have $4,382:  $2,000 x (1.04 ^ 20).

What if’s:  rising tax rates, capital gains, return, deferral period, Roth

In this simple example, the qualified plan clearly beats the taxable account.  But what if tax rates are higher at withdrawal?  For the $4,382 in the taxable account to beat the qualified plan, the tax rate would have to suddenly jump to 54.5% at withdrawal:  $3,000 x (1.06 ^ 20) x (1-.545) = $4,378.   Any tax increase that happens more gradually would be worse for the taxable account, with no effect on the qualified plan.

What about capital gains?  If the current 15% long term capital gains rate is sustainable and all your investments qualify, your effective return is 5.1% (6% x (1-.15)).  You still start with $2,000 to invest after tax, so after 20 years you would have $5,408:  $2,000 x (1.051 ^ 20).  That’s not bad, but it’s still less than the $6,414 you would have had from a qualified plan.

What about different investment returns and deferral periods?  We’ve used 6% return for 20 years in this simple example, but how does it change for other returns and time periods?  The short answer is that higher investment returns and longer deferral periods favor the qualified plan.  Lower returns and shorter time favor the taxable account.

What about a Roth IRA or 401(k)?  As it turns out, Roth and regular 401(k) results are identical if your marginal tax rates are equal at contribution and withdrawal.  Roth is better if your marginal rate at withdrawal is higher than at contribution time; otherwise a regular 401(k) is better.  And they both blow the taxable account out of the water.

These examples confirm the value of tax deferral in qualified retirement plans. As included in the examples the tax rate would have to increase to 54.5% at withdrawal to make tax deferral a bad deal. The Roth example is simple yet effective.

Please comment or call to discuss.

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An Employer’s Guide in Choosing which Retirement Plan to set up

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There are many options with regard to retirement plan choices for your business. A proper analysis must be prepared to determine which option is best for you.

One of the difficult choices for an employer in deciding to sponsor a plan is which type of qualified plan to sponsor. Here is just a small list:

  1. Number of employees to participate: The more, maybe not the merrier. But the more, is less likely you will be pursuing a defined benefit plan and more likely pursuing a 401(k) plan.
  2. Age and compensation of the owner(s)/highly compensated employees. Despite what the folks protesting at Wall Street believe, one of the goals of setting up a retirement plan is saving the maximum for the owners and highly compensated employees of the business.  One way to achieve the maximum savings is the use of a defined benefit plan or a cross tested allocation that will award higher contributions to these high paid employees and some of the key factors are age and compensation.
  3. How much can the Employer afford to contribute? When it comes to defined benefit plans and safe harbor 401(k) allocations, as well as the near obsolete money purchase plans, the employer must dedicate a fixed contribution each year (which is decided after the end of the Plan Year). Does the Employer see that it has the cash flow over the next couple of years to make such a financial commitment? I can’t tell you how many times that I have had sole proprietors say they want to save the maximum under a defined benefit plan. All of a sudden, they needed to pare back after the sticker shock of the maximum contribution that the actuary determined.
  4. Ask the Employees. A small business is usually not a democracy, but is may be wise to ask employees on the input of setting up a retirement plan. Namely the questionnaire really should be tailored towards trying to indentify whether they see this plan as an important employee benefit  and if the employer decides the 401(k) route, whether the employees would defer. Now employees shouldn’t have a say in designing the plan since they aren’t going to be the ones funding the contribution.
  5. Find a financial advisor. If a small business has a non-owner employee, a financial advisor should be hired. No ifs, ands, or buts.

Proper plan design is critical when deciding on a company retirement plan. There are many alternatives that fit your situation now and you can change when circumstances warrant.

Please comment or call to discuss how this affects your company and you.

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