Due to the rapidly changing landscape of the retirement plan world, especially in light the passage of the SECURE 2.0 legislation, I can no longer vouch for the accuracy of the information presented by this site. Consider it a vanity piece from a long-time, no longer authoritive author.

MEETING YOUR BUSINESS RETIREMENT PLAN NEEDS

A business retirement plan is one of the best tax shelters and a competitive hiring tool.

A well-designed and managed retirement plan is one of the most sought-after employee benefits and one that will help you attract and retain qualified people. At the same time, a retirement plan can provide you, as the employer, with tax benefits that enable you to make the most of your business's assets.

Choosing the right plan for your business depends on many factors: your goals for establishing a plan, the size of the annual plan contributions you can comfortably commit to, and a wide range of specific issues related to your company.

Peregrine Pensions, LLC can accommodate the unique goals and needs of your business by offering a broad range of innovative retirement plans and services. This page provides an overview of the types of plans available. Specific design options and consultation can be obtained by sending E-Mail to chip@peregrinepensions.com

For a detailed look at the services we provide, Click here.

COMMON PLAN FEATURES

Eligibility Requirements Qualified Plans generally must allow employees to become Participants after completing one year of service. For more information on eligibility and participation, click here.

Integration Retirement Plans are allowed, to a limited extent, to skew contributions or benefits in favor of the more highly compensated employees. The IRS allows this because Social Security Benefits are only based on compensation below the Taxable Wage Base. For more information about Integration, click here.

Participant Loans Participants can be allowed to borrow for any purpose under all the above plans. There are various rules regarding interest rates, repayment schedules and loan limits. Some loan specifics.

Vesting Vesting is used as a tool to retain employees. Generally, an employee must become fully vested after seven years of employment. Depending on benefits and eligibility requirements, the period an employee must vest may be shortened. See vesting.

TYPES OF PLANS

Retirement Plans are generally categorized as defined contribution plans or defined benefit plans.

Under defined contribution plans, contributions are generally made as a percentage of compensation. Participants' retirement benefits are based on the amount of the contributions and the investment performance of the assets.

Under defined benefit plans, contributions are based on actuarial factors, compensation, age and years of service for each employee. Benefits are generally defined to be a percentage of compensation to be provided for life after retirement age is reached.

PROFIT-SHARING PLANS

Profit-Sharing (PS) Plans are well suited for businesses with uncertain or fluctuating profits. In addition to the flexibility in deciding the amounts of the contributions, a Profit-Sharing Plan can include options such as service requirements, vesting schedules and plan loans that are not available under SEPs. Contributions may range from 0% to 25% of eligible employees compensation, to a maximum of $66,000 per employee. Generally, a Trustee is named to direct the investment of the Plan assets, though participants can be allowed to invest their own account.

MONEY PURCHASE PLANS

With the changes brought about by the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), many practitioners have sounded the death knell for the Money Purchase Plan. I believe this is a bit premature. Although contribution levels of Profit-Sharing Plans now equal those of the Money Purchase Plan, the fact that the contributions are required has significant value in the eyes of Employees.

Money Purchase (MP) Plans provide for a mandatory percentage of compensation to be contributed each year. The annual contribution limit on these plans is the lesser of 25% of compensation or $66,000. Click here for some examples.

THE MP/PS COMBINATION

Many more mature businesses establish a Money Purchase and Profit-Sharing Plan. The Money Purchase Plan usually requires a fixed 10% of compensation commitment, while the Profit-Sharing Plan provides the additional flexibility to contribute up to an additional 15% of compensation, for a total of 25%.

This combination was very popular before the enactment of EGTRRA. A large number of these combination plans have been merged together with the Profit-Sharing Plan becoming the remaining plan, because the deduction limit of the Profit-Sharing Plan rose from 15% to 25% of compensation. In addition, because of a requirement that all Plans be restated for GUST (an acronym for four or five laws passed in the late nineties), merging and then restating the Profit-Sharing Plan saved the expense of also restating the Money Purchase Plan.

401(k) PLANS

A 401(k) Plan allows employees to contribute a portion of their own incomes toward their retirement. The employee contributions, not to exceed the limits below, reduce a participant's pay before income taxes, so that pre-tax dollars are invested. Employers may offer to match a certain percentage of the employees' contribution, increasing participation in the plan. For more 401(k) information, click here.

The amount an employee may contribute, or "defer", is shown here:

* If you are 50 or older is determined on the last day of the Plan's accounting year. If you know you'll be 50 by then, you may take advantage of the new limits now. These increased limits are known as "catch up" limits. Deferrals made under these increased limits are generally disregarded when applying the various compliance tests.

401(k) Plans are subject to special Non-Discrimination rules. These are some things Employers should know before starting a Plan.

ONE-MAN 401(K) PLANS

A new planning opportunity opened up with the passage of EGTRRA. The limit on contributions to Profit-Sharing Plans, of which 401(k)s are a subset, is 25% of eligible employees' compensation. EGTRRA provides that 401(k) deferrals are not counted against the 25% of pay limit.

If you're a one person company, you should consider adopting what some are calling a "Uni-K", "Individual 401(k) Plan" or "Solo 401(k)". These are simply one person 401(k) Plans.

Without a 401(k) feature, if you make less than $264,000, the 25% of pay contribution limit comes into play. You can't get to the $66,000 annual addition limit with a standard Profit-Sharing Plan.

If you add a 401(k) feature , you can make a company contribution of 25% of pay and defer up to the deferral limits. There are no non-discrimination rules because you're the only eligible employee.

In 2023, that means compensation of $174,000 will get you up to the $66,000 limit ie: 25% of $174,000 = $43,500 plus $22,500 in deferrals.

If you are 50 or older, the numbers would be: Earnings $174,000; 25% of pay = $43,500. Add deferrals of $22,500 plus catch-up allowed of $7,500 for your $73,500 total.

TARGET BENEFIT PLANS

Target Benefit Plans are primarily designed to provide larger contributions for older participants nearing retirement age. The contributions are required each year. The contribution is limited to 25% of all eligible employees compensation. Under some circumstances, an individual participant may receive an allocation up to 100% of compensation or $66,000 if less. For an example of a Target Benefit Plan, click here.

AGE WEIGHTED PROFIT-SHARING PLANS

Age Weighted Profit-Sharing Plans (AWPS) are similar to the Target Benefit Plans described above, except that the contribution is discretionary, rather than mandatory.

In some circumstances, a better allocation can be achieved under these plans, because Target Benefits are based on a three year average of compensation, while the AWPS is based on current compensation.

DEFINED BENEFIT PLANS

In contrast to the previously described plans, defined benefit plans are designed to provide a desired retirement benefit for each participant. This type of plan can allow for a rapid accumulation of assets over a short period of time. The required contribution is actuarially determined each year, based on factors such as age, years of employment, the desired retirement benefit, and the value of plan assets. Contributions are generally required each year and can vary widely. The maximum benefit allowed to be funded is 100% of compensation, to a maximum of $265,000. Note that this is NOT a CONTRIBUTION limit.

For an example of what a first year contribution might look like, Click here.

KEOGH PLANS

A "Keogh Plan" refers to a Retirement Plan for self-employed people. Any of the Plans mentioned above, if adopted by a self-employed person, could be called a Keogh Plan.

Determining contribution limits is a little trickier than for W-2 employees. If you use Microsoft Excel, here's a spreadsheet that may help (If you're asked for a password, click Cancel) .

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Questions or comments can be directed to us at E-Mail chip@peregrinepensions.com .