Qualified retirement plans

Choosing the right retirement plan for your business

Many business owners today are faced with an increasing need to provide a retirement benefit for themselves and their employees. At Raymond James, listening to you and helping you and your employees plan for retirement are top priorities. Selecting the right retirement plan for your business is a crucial step, and providing one has many benefits.

One advantage is that contributions to a retirement plan today can help you meet tomorrow’s goals of financial security.

Another is that establishing a retirement plan may provide tax advantages. Eligible contributions are deductible expenses to your business, and all contributions grow tax-deferred until withdrawn.1

1 Additionally, eligible small employers will receive a tax credit equal to the lesser of $500 or 50% of the startup costs associated with the plan.

Still another benefit is that it can create positive employee relations, helping to attract and retain quality employees, while reducing turnover.

For many business owners, the question is not “Should I implement a retirement plan?” Rather, it is “Which plan is right for my business?” The choices are many: SEP, profit sharing, 401(k), SIMPLE IRA and defined benefit, to name a few.

This web page is designed to resolve some of the confusion caused by the wide range of choices available to business owners like you. It offers an overview of the features and advantages of the different types of plans, as well as a chart that provides a more detailed look at the specific characteristics of:

Before examining your available choices, let’s consider some basic facts about the different types of retirement plans. Two general categories are available: defined contribution plans and defined benefit plans. Defined contribution plans, as the name implies, define the contributions to be made each year the plan is in operation. An allocation formula specifies a percentage of compensation to be contributed on behalf of each participant. The monies grow tax-deferred until withdrawn from the plan.

Defined benefit plans, on the other hand, define the benefits to be received at retirement. The employer determines, within IRS limits, the level of benefits, such as a fixed monthly payment or a certain percentage of compensation. Contributions are made annually to fund these benefits based on certain actuarial assumptions and the benefit formula stated in the plan document.

Other plans listed on this web page are considered defined contribution plans. All, except SEP, SIMPLE and safe harbor 401(k) plans, allow employer contributions to be subject to a vesting schedule that requires a certain number of years of service to become fully vested.

Most employer sponsored-retirement plans are required to file a Form 5500 with the IRS, which discloses specific plan activities during the year. The preparation and filing of this annual report adds to the administrative expense of maintaining the plan. Your tax advisor can provide more specific information on this process, or your Raymond James financial advisor can assist you in finding a plan administration professional.

Employee withdrawals from a retirement plan made before the age of 59½ or normal retirement age may be subject to an IRS penalty for early withdrawal, in addition to being subject to ordinary income tax. Additional brochures that address plan distribution issues are available upon request.

Simplified employee pension (SEP) plans

A Simplified employee pension plan is an employer-sponsored retirement plan that, unlike a traditional qualified plan, has minimal IRS reporting and disclosure requirements for compliance. The employer deposits contributions into the IRA of each plan participant, not into an employer trust account, thereby simplifying the accounting process. Any type of business entity, including a sole proprietorship, partnership or corporation, as well as certain tax-exempt organizations, can establish a SEP plan for its employees. The plan must be in place and funded by the date the employer’s tax return is due, including extensions. Most SEP plans are established using the IRS Model 5305-SEP form.

Eligibility

An employee who is at least 21 years old and has worked for the employer in any three of the preceding five years is eligible to participate. A SEP contribution must be made in the current year on his or her behalf, provided the employee earned in excess of the minimum indexed compensation amount ($550 in 2012). The employer may set less restrictive age or service requirements, but the eligibility rules must be applied on a consistent basis to all employees, including owner-employees.

Contributions

A SEP plan is funded by the employer on a discretionary basis. The contribution limit for a SEP plan is the lesser of 25% of an individual employee’s compensation or $50,000 (indexed for 2012) and is generally allocated on a uniform percentage of salary basis. Social Security integration is allowed in SEP plans, but increases the administrative complexity and cost, and is available only when a prototype SEP plan document is used.

The primary difference between SEP and profit sharing plan contribution limits is that the 25% SEP limit is applicable to each individual participant, whereas the 25% profit sharing limit is applicable to the employer contribution as a percentage of the company’s eligible payroll.

Advantages

A SEP plan is easy to set up. It is comparable to an employer establishing and funding a company provided IRA for the benefit of each employee. There are no requirements for a separate employer trust document, and administrative costs are minimal. Employers sponsoring SEP plans are not required to file annual plan returns (Form 5500) like those employers sponsoring qualified pension or profit sharing plans. In addition, the SEP plan offers tax planning and contribution flexibility. An employer can establish a SEP plan up until its tax-filing deadline, unlike qualified pension or profit sharing plans, which must be in place no later than the last day of the plan year.

SIMPLE IRA plans

Many small business owners are looking for a retirement plan that allows employees to defer a portion of their salaries, without the complexity and the administrative requirements of a 401(k) plan. A SIMPLE IRA plan, which works much like a 401(k) plan but without the administrative cost, may be the solution. Any type of business entity, including a sole proprietorship, partnership or corporation, as well as certain tax-exempt organizations, can establish a SIMPLE IRA plan for its employees. A SIMPLE plan also can be established as a SIMPLE 401(k) trust account, but is not utilized in this format very often. For that reason, the information provided in this section is specific to the SIMPLE IRA format.

Eligibility

An employer maintaining a SIMPLE plan may not maintain any other qualified plan in which the employees currently receive benefits. An eligible employer is defined as having 100 or fewer employees. Employees must be eligible if they receive at least $5,000 in compensation during any two preceding years and are expected to earn at least $5,000 in the current year. A less restrictive eligibility requirement may be utilized. There are no minimum participation requirements.

Contributions

Employees may defer up to $11,500 (indexed for 2012), with no set maximum percentage of compensation.2 The employer must make a mandatory contribution as either a matching dollar-for-dollar contribution on the first 3% elective deferral or a 2% uniform contribution to all eligible employees, regardless of whether they made an elective deferral. (The employer can elect a lower matching contribution in two out of five consecutive years.)

2 Employees age 50 and older may make a catch-up contribution of $2,500 for 2012.

Advantages

A SIMPLE plan is not subject to nondiscrimination tests or top-heavy requirements. If the SIMPLE IRA format is used, there is no requirement to file a Form 5500. As a result, there are minimal plan administration costs, and highly paid or owner-employees are not restricted in their ability to defer as a result of low participation by the lower-paid employees.

Profit sharing plans

Profit sharing plans offer both design flexibility and discretion as to making contributions. Company contributions are determined by the employer and can be allocated in a number of ways. If the company makes little or no profit during a year, no contribution is required, although low profits don’t restrict the contribution level. A profit sharing plan can include an option allowing the company to make contributions even if the company has no profit.

Eligibility

Typically, the eligibility provisions require an employee to have one year of service and be at least 21 years of age. A two-year service period may be imposed if full immediate vesting is provided. For most plans, a year of service is defined as working 1,000 hours in a plan year.

Contributions

An employer’s maximum deduction is limited to 25% of the annual compensation paid to eligible employees. The individual maximum contribution limits for employees applied to all defined contribution plans are the lesser of 100% of compensation or $50,000. Depending on the allocation formula in a profit sharing plan, the contributions for individual employees may exceed the 25% level as long as the aggregated employer contribution does not exceed the 25% maximum employer contribution limit.

Advantages

The employer can make a discretionary contribution each year, which can be subject to a vesting schedule. A profit sharing plan may be integrated with Social Security or may utilize one of the allocation methods described in a later section of this web page.

Age-weighted or comparability (cross-tested) profit sharing plans

These plans utilize allocation methods that base contributions on both the age and compensation of eligible employees, similar in concept to a defined benefit pension plan, but with discretionary contributions. Treasury regulations adopted in 1991 allow profit sharing plan nondiscrimination testing under Section 401(a)(4) to be based on anticipated benefits at retirement, similar to defined benefit plans, as opposed to the level of contributions made in that particular year, as defined contribution plans had been required to do in the past.

Eligibility

Employee eligibility requirements for age-weighted or comparability profit sharing plans are the same as those for regular profit sharing plans.

Contributions

In an age-weighted plan, the participant’s age, or length of time until retirement, is factored into the allocation formula on an individual basis, so older participants receive a larger proportionate share of the contribution. The comparability plan allows the employer to select classes of employees that provide for different contribution allocation levels for each group. If the nondiscrimination tests are met, the employer can allocate a larger proportionate share of the company’s contribution to specific employees the employer wishes to benefit the most.

Advantages

An age-weighted plan may be appropriate if a business wants to favor older, highly paid participants. Comparability plans allow an allocation that benefits a specific class of employees. If the favored group is, on an aggregated basis, older than other classes of employees, the allocation formula is likely to pass the required nondiscrimination tests.

401(k) profit sharing plans

A 401(k) plan is a type of profit sharing plan that includes an elective salary deferral provision. The employer typically has the ability to make a matching contribution that is tied to the elective salary deferral, as well as a profit sharing contribution that is allocated to all eligible participants. Plan participants usually have the ability to select their own individual asset allocations from various investment alternatives available to the plan.

Roth 401(k) profit sharing plans

A Roth 401(k) plan is a new feature of a 401(k) plan that permits participants to make after-tax salary deferrals into a 401(k) plan. If the employer elects to offer the Roth 401(k) provision, participants will have a choice of making pretax or after-tax salary deferrals.

Eligibility

Employee eligibility requirements for 401(k) plans are typically one year of service and age 21.

Contributions

The three common 401(k) contribution types are:

  • Elective salary deferral – the employee can defer up to $17,000 for 2012. (This is an indexed amount subject to cost of living adjustments and may change each year.)
  • Employer matching – the employer can make a discretionary contribution based on a percentage of the employee’s elective salary deferrals.
  • Profit sharing – can be allocated in any method available to regular profit sharing plans.

An employer’s maximum deduction is limited to 25% of the annual compensation paid to eligible employees.3 In addition, the employer must meet several nondiscrimination tests, which may further limit the amounts deferred by certain highly paid employees.

3 Only employer matching and profit sharing contributions.

Employees age 50 and older may make a $5,500 catch-up contribution, which does not count against their individual maximum annual additions limit of the lesser of $50,000 or 100% of compensation.

Advantages

A 401(k) plan allows both employer and employees to contribute toward retirement while reducing the current tax burden of both. Because employees are actively involved as participants, 401(k) plans typically have a high visibility level in terms of the employee’s perception of the benefit being provided by the employer.

401(k) safe-harbor plans

A safe harbor 401(k) plan is not subject to nondiscrimination tests, therefore all employees have the opportunity to maximize deferrals.

Eligibility

Employee eligibility requirements are the same as those for a 401(k) profit sharing plan.

Contributions

Contribution types and limits are the same as those for a 401(k) profit sharing plan, with a ”safe harbor” exception. To qualify for the exception, the employer must make a 100% vested contribution of either:

  • 3% of compensation for each eligible employee or
  • A matching contribution of up to 4% of compensation.

The safe harbor then permits the owner and other highly compensated employees to defer the maximum without regard to the deferral levels of the non-highly compensated employees.

Advantages

In addition to the advantages offered by a 401(k) profit sharing plan, the safe-harbor 401(k) avoids the nondiscrimination testing that may limit the amounts the highly compensated employees may defer.

Owner only/one-person 401(k)

A recent tax law permits the owner/partner/shareholders of a small business, and their spouses, to maximize contributions if net compensation is less than $200,000 (indexed for 2012).

Eligibility

Employee eligibility requirements are typically limited to attainment of age 21.

Contributions

Contribution types and limits are the same as those for a 401(k) profit sharing plan, including Roth 401(k) salary deferrals.

Advantages

Filing a Form 5500EZ is not required until either the total plan assets exceed $250,000 (for plan years beginning in 2007 and later) or an employee other than an owner/partner/shareholder or their spouse enters the plan. Additionally, discrimination testing is not required until an employee other than an owner/partner/shareholder or their spouse enters the plan.

Defined benefit pension plan

A defined benefit pension plan is designed to provide a specific benefit amount at retirement. This is the traditional pension plan in which the employer bears the risk of providing the promised level of retirement benefits to participants.

Eligibility

Employee eligibility requirements for a defined benefit plan are the same as those for defined contribution plans.

Contributions

Unlike the defined contribution plans previously discussed, the defined benefit plan limit is based on the benefit to be received at retirement, not on the annual contribution. Each year the plan’s actuary determines the required annual contribution based on several factors such as age, salary level and years of service, as well as interest rate assumptions. The maximum annual benefit for which a plan may fund is 100% of the participant’s compensation up to $200,000 (indexed for 2012).

Advantages

For participants closer to retirement, contributions to a defined benefit plan may exceed the 100% or $50,000 limit imposed by defined contribution plans. This may be advantageous to a business owner who is approaching retirement age, has never started a retirement plan and wishes to put away as much money as quickly as possible. A defined benefit plan can also be advantageous for an employer wanting to provide a fixed benefit or to favor older employees.

Benefits of retirement planning with Raymond James

Our approach is different from other investment firms in that Raymond James does not have a proprietary fund package on top of its list of retirement plan alternatives and services. We utilize what we believe to be the top providers in the retirement plan market. This allows us to maintain a more consultative approach to help our clients select the package that best fits the needs of their businesses. In addition, we work with many professional plan administration firms within the industry, so we can help provide solutions to more complex plan designs or compliance needs that may arise with a customized plan.

Prototype plans

We offer the small business a variety of retirement plan options. Our prototype plans are easy to adopt and maintain. Raymond James currently offers profit sharing and 401(k) profit sharing prototype plans. Raymond James provides automatic updates of prototype plans, making it simple and inexpensive to keep your plan up-to-date with any tax law changes.

Asset protection

This firm is a member of the Securities Investor Protection Corporation (SIPC), which protects securities customers of its members up to $500,000 of net equity protection, including $250,000 for claims for cash awaiting reinvestment. Please visit sipc.org for more information about SIPC coverage.

Raymond James has purchased excess SIPC coverage through various syndicates of Lloyd’s, a London-based firm. Excess SIPC is fully protected by the Lloyd’s trust funds and Lloyd’s Central Fund. The additional protection currently provided has an aggregate firm limit of $750 million, including a sub-limit of $1.9 million per customer for cash above basic SIPC for the wrongful abstraction of customer funds.

Account protection applies when an SIPC-member firm fails financially and is unable to meet obligations to securities clients, but it does not protect against market fluctuations.

Investment flexibility

A Raymond James account allows contributions to be invested in a wide range of investment alternatives.

Professional service

Our financial advisors have the training and expertise to assist you in choosing the retirement plan for your business and the investment strategies for your plan.

Retirement Plan Comparison Chart

Plan Type Ideal For Maximum Annual Contribution Eligibility Contribution Obligation Plan Setup Deadline Contribution Deadline Plan Features

SEP IRA (simplified employee pension)

Smaller firm, corporate or noncorporate, seeking to minimize filings, paperwork and overall cost.

The lesser of 25% of employee’s net compensation or $50,000 (indexed for 2012).

Any employee age 21 or older who has worked for the employer in any three of the preceding five years must be eligible.

Discretionary. An eligible participant shares in the current year contribution if he or she earned in excess of $550 (indexed for 2012).

On or before employer’s due date for filing federal tax returns (including extensions).

On or before employer’s due date for filing federal tax returns (including extensions).

Minimal IRS reporting and disclosure.

Employer contributions are 100% vested.

SIMPLE IRA (savings incentive match plan for employees of small employers)

Employer with 100 or fewer employees (earning $5,000 or more) during the past year wanting a plan that allows employee elective salary deferral contributions, requires minimal IRS reporting and has minimal cost.

Elective salary deferral limit of $11,500 (indexed for 2012), with no limit as to percentage of compensation. Mandatory employer contribution to eligible participants. No additional contribution can be made.

Any employee who has earned $5,000 from the employer in any two preceding years and is expected to earn $5,000 in the current year must be eligible.

Elective salary deferrals are not subject to nondiscrimination tests. Mandatory employer contribution of either 3% match or 2% nonelective to all eligible employees.

October 1 for startup plans. Employees must have 60-day election period prior to January 1 (or the first day they are eligible) in which they can modify elections.

Salary deferrals should be deposited as soon as administratively feasible. The employer contribution deadline is the same as the SEP plan.

Simple implementation process.

Employer contributions are 100% vested.

Mandatory employer contribution.

May not combine with another plan.

$2,500 catch-up contribution available.

Profit sharing

Employer seeking flexibility of discretionary contributions and the ability to impose a vesting schedule on these contributions.

Employer contribution is limited to 25% of total eligible compensation. Depending on the allocation method used, an individual participant could receive up to the lesser of 100% of compensation or $50,000.

Employees age 21 or older with one year of service must be eligible if a vesting schedule is imposed. A two-year eligibility period may be imposed if immediate vesting is provided.

Discretionary.

December 31 (or end of employer’s tax year).

On or before employer’s due date for filing federal tax returns (including extensions).

Discretionary contribution.

Requires Form 5500 to be filed.

Plan costs may be minimized by using a vesting schedule.

Age-weighted or comparability profit sharing

Small business or professional practice wishing to favor either the older employees or a specific group of employees.

Employer contribution is limited to 25% of total eligible compensation. These allocation methods allow an individual participant to receive up to the lesser of 100% of compensation or $50,000.

Employees age 21 or older with one year of service must be eligible if a vesting schedule is imposed. A two-year eligibility period may be imposed if immediate vesting is provided.

Discretionary.

December 31 (or end of employer’s tax year).

On or before employer’s due date for filing federal tax returns (including extensions).

Discretionary contribution.

Allocation favors older and/or key employees.

Requires Form 5500 to be filed.

Custom-designed plan with higher startup costs.

401(k), includes Roth 401(k)

Employer with more than 25 employees wanting a plan that allows employee elective salary deferrals.

Elective salary deferral limit of $17,000 (indexed for 2012). Overall individual limit (deferrals plus employer contributions) is 100% of compensation up to $50,000. Employer contribution limit (including deferrals) is 25% of eligible payroll.

Employees age 21 or older with one year of service must be eligible to make elective salary deferrals if a vesting schedule is imposed on employer contributions. See preceding profit sharing plan section as to eligibility for employer contributions.

Elective salary deferrals optional but subject to nondiscrimination test. Employer may choose to match employee elective deferrals and/or make a discretionary profit sharing contribution.

December 31 (or end of employer’s tax year).

Salary deferrals should be deposited as soon as administratively feasible. Employer contribution deadline is on or before employer’s due date for filing federal tax returns (including extensions).

Employee salary deferral reduces taxable income.

May offer participant direction of investments.

Employee contributions are immediately 100% vested.

Plan may shift costs from the employer to the employee, thereby reducing overall plan cost.

Requires Form 5500 to be filed.

$5,500 catch-up contribution available.

Safe-harbor 401(k), includes Roth 401(k)

Employer wanting a plan that allows employee elective salary deferrals, without nondiscrimination testing.

Elective salary deferral limit of $17,000 (indexed for 2012). Overall individual limit (deferrals plus employer contributions) is 100% of compensation up to $50,000. Employer contribution limit (including deferrals) is 25% of eligible payroll.

Employees age 21 or older with one year of service must be eligible to make elective salary deferrals if a vesting schedule is imposed on employer contributions. See preceding profit sharing plan section as to eligibility for employer contributions.

Elective salary deferrals are not subject to nondiscrimination tests. Mandatory employer contribution of either 3% nonelective to all eligible employees or match of up to 4%.

October 1 of year in which plan is started. Employees must have election period of 30 to 90 days immediately preceding January 1 (or the first day they are eligible) in which they can modify elections.

Salary deferrals should be deposited as soon as administratively feasible. Employer contribution deadline is on or before employer’s due date for filing federal tax returns (including extensions).

$17,000 elective salary deferral limit without ADP testing.

Mandatory employer contributions are 100% vested.

Contribution format must be disclosed during 60-day notification period.

$5,500 catch-up contribution available.

Owner only/one-person 401(k), includes Roth 401(k)

Employer where the only employees are owners/partners/shareholders and their spouses, earning less than $200,000 each, and seeking to maximize employer contributions.

Elective salary deferral limit is $17,000 (indexed for 2012), plus employer contributions of up to 25% of compensation. Overall individual limit (deferrals plus employer contributions) is 100% of compensation up to $50,000, plus any catch-up contribution.

Employees age 21 or older with one year of service must be eligible to make elective salary deferrals if a vesting schedule is imposed on employer contributions. See preceding profit sharing plan section as to eligibility for employer contributions.

Discretionary.

December 31 (or end of employer’s tax year).

Salary deferrals should be deposited as soon as administratively feasible. Employer contribution deadline is on or before employer’s due date for filing federal tax returns (including extensions).

May offer participant direction of investments.

Allows vesting schedule.

Requires Form 5500EZ to be filed only after assets exceed $250,000 or any employee other than an owner or owner’s spouse enters the plan.

$5,500 catch-up contribution available.

Owner/employee can maximize contribution with minimal salary.

Defined benefit

Employer wanting to offer a fixed benefit or to favor older employees. Ideal for a small business owner at least 45 years of age who never sponsored any type of retirement plan.

An actuarially calculated amount, based on a benefit not to exceed 100% of a participant’s compensation, up to an indexed figure currently at $200,000 for 2012.

Employees age 21 or older with one year of service must be eligible if a vesting schedule is imposed. A two-year eligibility period may be imposed if immediate vesting is provided.

Mandatory, based on specified benefit formula. Amount is determined by an actuary and requires quarterly minimum contributions.

December 31 (or end of employer’s tax year).

On or before employer’s due date for filing federal tax returns (including extensions).

Employer promises a specific established level of benefits to employees at retirement.

Individual participants can exceed the $50,000 limit (Sec. 415) imposed by defined contributions plans.

Requires annual actuarial valuation and review.

Requires Form 5500 to be filed.

General rules

After reading this web page you should understand the general rules of retirement plans. The following summary is designed to help you in clarifying these ideas relative to the plan selection.

  • For employers with a long time horizon to fund a plan for their employees, defined contribution plans work well.
  • For sole proprietors or small business owners wishing to minimize administrative costs, a SEP or SIMPLE may be the best choice.
  • For small business owners without employees wishing to maximize contributions, a one-person 401(k) may be the right plan.
  • Profit sharing is appropriate if discretionary contributions or a vesting schedule are important.
  • For employers with older key employees, defined benefit or age-weighted plans may be more appropriate.
  • For employers who wish to have their employees fund a portion of the retirement cost, a SIMPLE or 401(k) plan may be most suitable.

Conclusion

What is the right retirement plan for your business? The retirement plans discussed here illustrate that there are a wide variety of choices available to you as a business owner. With help from your financial advisor – a professional committed to your needs – you can choose the plan that best suits your business retirement plan needs and objectives. Of course, we cannot offer legal advice to clients. Before implementing any plan, you should consult with your tax and/or legal advisors.

For more information about any of the qualified retirement plans mentioned here, please contact your Raymond James financial advisor or use the convenient Office Locator to find our office(s) nearest you.