Ubiquity Retirement + Savings Logo

Category: 401(k) Resources

Find easy to understand 401(k) Resources and information from Ubiquity Retirement + Savings. Find easy to understand rules and regulations, along with tips and advice from our team of 401(k) experts. Free consultation! Call Ubiquity today at 855.466.5825

New comparability 401(k) plans are set up so that employers can create customized retirement plan contributions for different groups of employees. This allows them you reward select groups with higher contributions while still offering healthy employer contributions to others.

Known as a qualified defined contribution plan, the profit-sharing formula works by projecting out an employee’s current contribution to a future retirement-age benefit.

How Do New Comparability Plans Work?

New comparability profit sharing plans offer compliance with 401(k) nondiscrimination laws, while allowing larger contributions to older participants — particularly owners and highly compensated employees.

  • Employees are divided into groups
  • Each group can receive a different level of profit share contribution, determined annually
  • For nondiscrimination tests, the value of contributions at retirement age factors in
  • In essence, 15% to a 55-year-old can be as valuable as 5% to a 30-year-old
  • Non-HCEs receive a gateway minimum contribution (1/3 the highest rate or 5% of their pay)

New comparability plans can be combined with Safe Harbor plans, but the gateway minimum contribution must still apply, even if your company makes a 3% non-elective contribution already.

How much will you pay for 401(k)? Get an instant quote.

How many employees do you have?
I am a sole proprietor
(just me/or my business partner/spouse)

New Comparability Plan Benefits for Small Businesses

Maximum HCE Retirement Savings:

If your small business has a disproportionate number of owners and key employees, it can be difficult to reach the combined limit for 401(k) plan contributions. Small businesses may delay or decline profit sharing contributions due to the financial burden of pro-rata allocations that are seemingly costly.

However, by giving different rates to different employee groups, business owners can be sure everyone gets their fair share. Small business owners can contribute to their own small business 401(k) accounts as both employer and employee. The maximum any employer can put away for 2022 is $61,000 ($20,500 as an employee + $40,500 as the employer), PLUS $6,500 for those age 50 or older.

Plan Flexibility:

With a flexible new comparability plan, small business owners can opt to offer a profit share on a good year and forego or reduce it during years of lower return or heavy investment. The contributions may also increase or decrease from year to year, at your discretion and depending on your business situation and goals.

Tax Deductibility:

Employer contributions are not subject to payroll tax and are generally tax deductible. This helps to lower the company’s overall tax burden for the year, as well as the business owner’s personal income tax rate.

Rewards for Older Employees:

As a small business owner, you may be older than most of their workforce and earn a higher salary. Choosing a new comparability plan may make sense for your personal finances. This choice of plan also rewards an experienced executive team.

Rewarding loyalty and longevity is another main reason small business owners offer 401(k)s, particularly these days when job-hopping is the norm and talent retention can be such a challenge. As key employees get older, they will no doubt be thinking about their own retirements and how they might grow their assets at a quicker pace.

Is a New Comparability Plan Right for Your Small Business?

Small businesses can benefit from a new comparability plan, though they may not be ideal for outfits with a highly fluctuating workforce. Changes in enrollment numbers could impact funding costs. Also, keep in mind these plans must pass a special IRS nondiscrimination test. This test proves that highly compensated employees aren’t being treated overly favorably in the retirement plan setup — as opposed to a Safe Harbor plan, which automatically passes testing.

Questions? Contact Ubiquity to explore all of your small business retirement plan options.

Guest post by Robby Forsythe, Senior Retirement Plan Consultant

Why was the seafood restaurant being investigated by the IRS?
It was suspected of being a shell company in some fishy business. 

By now you’ve heard that the IRS has been allotted an extra $80 billioni. Why does the IRS having this incredible amount of money matter to your small business? Well, for some of my clients that I’ve talked to, it’s a source of some consternation…the only people I think are happy about this are…IRS agents.  

The good news (if there is any) is they don’t get this money all at once – it’ll be doled out over a decade. Still, that’s a lot of money for one of my least-favorite government agencies, so here’s what I found about how the money will be used. Based on that, I have some ideas on how small business owners can avoid IRS attention. 

They might answer your call 

A portion of this budgeted money will go to replace more than 20,000 agents who left the agency since 2010 and the more than 50,000 agents who are due to retire in the next five yearsii. Talk about a Great Resignation! That’s a lot of attrition, and it means that there wouldn’t have been enough people to process your tax return or send you your refund if they couldn’t replace these agents.  

I also read that they want to hire more people in customer serviceiii so that when you call, you can actually talk to a human being rather than having to navigate a labyrinthine phone system with endless robo-questions or be stuck on hold for hours. Won’t that be nice? (OK, having to call the IRS is never “nice,” but this will be an improvement!) Michelle Singletary of the Washington Post reportediv in June that the IRS only answers about 10% of the calls they receive—that’s 10% more than I thought, so it can only get better from here, right?   

They’re supposed to be upgrading their computers 

Anyone watch the show Mad Men? Remember the giant, air-conditioned room full of machines that had less computing power than an Apple IIe? I’m pretty sure that’s what they’re still using over at the IRS.  

Their computer equipment and data storage, in many cases, hasn’t been upgraded since the 1960sv. As old as my dad! No wonder so many employees have left. Can you imagine trying to use a computer like that?  Also, I’ve read that some of the budget will be spent on improving cybersecurityvi. I think we all intuitively know that our data should be secure with the IRS, but that it may not be the Fort Knox we all hope for and wish it was.  

The IRS might be after you if… 

A lot of people are concerned about an increased likelihood of being audited.  And if your small business is earning more than $400,000 per year your tax advisor and you may get to know each other a lot more if you get audited. Even though the IRS has said that it will not expand audits on individuals earning less than $400,000 per yearvii, in my opinion, the amount of money they’re expected to raise with closer scrutiny of us all – means my small business clients could have a larger target on their back. What do you think?   

How much will you pay for 401(k)? Get an instant quote.

How many employees do you have?
I am a sole proprietor
(just me/or my business partner/spouse)

If you don’t want the IRS after you… 

Why didn’t Sherlock Holmes pay a lot of taxes?
Because he made brilliant deductions. (From @J_Stephens_CPA) 


While I can’t guarantee the IRS won’t audit you with their new capabilities, I have found that my small business clients who take these 6 steps seriously get audited at a much lower rate than those that don’t. So here are my 6 tips for your small business:
 

  • Be scrupulously honest about any donations. Lots of people overestimate the value of their donations and this is a huge red flag for the IRS. Those old clothes really aren’t worth much, and you probably know it!
  • Always keep your receipts. This is your evidence that what you say is true. Anytime you can back up a statement about your income, donations, expenses, etc., it’s better for you. Plus, you’ll need those receipts to back up your deductions. Anything you spend on your business such as office equipment, business travel, and even contributions to your employees’ retirement accounts may be tax-deductible, so you’ll need to have those receipts to prove it. 
  • Report every dollar of your or your business’ income. The IRS gets reports from other sources like employers, banks, investment firms, etc. that they use to verify what you report. If the numbers don’t match up, you guessed it: red flag. 
  • Don’t round. For reporting income, donations, amortization, whatever – use the real numbers instead of rounding them up or down. Never “guesstimate.” If your numbers look weird to the IRS based on those reports they receive from other sources, or if rounding causes math errors in your own calculations, you might be in trouble. 
  • Check your math! Not everyone got an A in accounting and IRS forms are notoriously complicated. But you need to go through your calculations with a fine-tooth comb AND a calculator. Errors may have been made by pure accident, but that’s not an excuse the IRS cares about. When in doubt, enlist the help of a certified tax accountant to help prevent mistakes. 
  • Don’t forget to sign your return. You’d be surprised by how many people skip this important and seemingly obvious step, but it’s a huge issue for the IRS. They will wonder what else you forgot and dig deeper. It’s so easy to knock this out in seconds, so make sure it’s on your tax return to-do list.  

One more idea for small business owners

Consider offering your employees a 401(k) retirement plan that has a Safe Harbor provision. This provision entails that you contribute to your employee’s accounts and in exchange, your plan is considered compliant with IRS requirements and releases you from any audit of that plan. (You can read more about Safe Harbor 401(k) plans here.) It isn’t the same thing as a regular income audit, but why not do all you can to avoid any audit? 

Any questions, suggestions, or other IRS jokes? Follow me on LinkedIn and share them on my page! Thanks for reading. 

 

References: 

https://www.cnbc.com/2022/08/08/reconciliation-bill-includes-nearly-80-billion-for-irs-funding.html

ii https://www.bloomberg.com/news/articles/2022-08-22/the-irs-getting-87-000-agents-won-t-mean-more-audits-now

iii https://www.wsj.com/articles/irs-to-start-spending-its-80-billion-budget-by-hiring-people-to-answer-the-phone-11661430600?mod=hp_listb_pos4

iv https://www.washingtonpost.com/business/2022/06/24/irs-taxpayer-calls

https://www.wsj.com/podcasts/your-money-matters/what-the-irss-plan-to-hire-87000-workers-means-for-taxpayers/7807bf07-ca99-48f6-ae93-590ad02a1734

vi https://www.washingtonpost.com/business/the-irs-has-problems-that-80-billion-wont-solve/2022/08/17/1fb1f71a-1e29-11ed-9ce6-68253bd31864_story.html

vii https://abcnews.go.com/Politics/treasury-department-rejects-gop-claims-irs-agents/story?id=88495613

 

How Does 401(k) Employer Matching Work? 

Siân Killingsworth / 14 Sep 2022 / 401(k) Resources

Graphic of a man holding a clipboard and gesturing at large floating coins and bills with a calendar nearby

A 401(k) is the standard retirement plan offered by companies across the nation as part of their employment benefits package. Many of those employers also offer what’s known as a matching contribution as an added benefit. Matching means that the employer contributes a specified amount to the employee’s retirement plan based on (i.e., matching) the employee’s annual contribution.

Why would an employer give money away? Well, there are three valuable benefits employers can derive from small business 401(k) matching:

  • Increased employee retention and morale
  • The ability to attract and retain top talent
  • Significant company tax incentives

How much can employees contribute to a 401(k)?

For 2022, employees can contribute a maximum of $20,500 per year and an additional $6,500 for people aged 50 or older. Keep in mind that employer matching contributions do not count towards this contribution limit. However, there is a limit for employer and employee contributions combined (if you are the business owner and are contributing as both the employer and employee): $61,000 or 100% of your salary, whichever comes first.

The average 401(k) match in 2022 was 6%. Specific terms of a 401(k) retirement plan can vary. Some employers use a very generous matching formula while others choose not to match employee contributions at all. Note that not all contributions to your employees’ retirement plan are due to matching. The plan document will contain details on how your company’s 401(k) works.

How much will you pay for 401(k)? Get an instant quote.

How many employees do you have?
I am a sole proprietor
(just me/or my business partner/spouse)

Types of company matching contributions:

  • Partial matching 

Partial matching means that the employer matches part of your 401(k) contribution, up to a specified amount. For instance, many employers offer a 50% match of the employee’s contribution, up to 6% of their salary.

  • 100% (full) match

Full 401(k) matching as a dollar-for-dollar match where the employer puts in the same amount of money the employee does – up to a specified amount. For instance, if the employee put in 4%, you as the employer contribute 4%. However, if the employee contributes 6%, you will still only need to contribute 4%.

401(k) vesting schedules

It is essential to understand the plan’s vesting schedule, which refers to how much of an employer’s contributions belong to the employee. This is usually based on how long the employee has worked at the company.

This means that the employee may forfeit their employer’s match if they are terminated or leave before a specified number of years. In other words, if the employee quits or is fired before the specified number of years pass, they may lose some or all of their employer’s contribution.

Can after-tax contributions be matched?

Employee contributions are earmarked for retirement and because they are made pre-tax, the IRS imposes strict rules on these contributions. Some companies offer a Roth 401(k) plan in addition to the traditional 401(k) plan. However, contributions to Roth 401(k) plans are made with the after-tax balance. This means that employees can withdraw from their Roth 401(k) tax-free after retiring.

The contribution limit for a Roth 401(k) is the same as for a traditional 401(k). However, unlike a Roth IRA, there’s no income limit for participating in Roth 401(k)s. Any match is considered good primarily because it is free money!

Ubiquity offers customized 401(k) retirement plans for your small business. Reach out today to learn about our affordable, easy-to-manage savings vehicles.

A comparison of state-managed IRA plans and a private 401(k) retirement plan.

On July 1, 2019, California’s new CalSavers 401(k) program began to fulfill its mission of offering workers in the state a new way to save for their retirements even if their employers do not offer a retirement plan.

CalSavers effectively addresses a crisis that is looming for a large number of employees by making it easier for them to save for their retirements. In many cases, however, a custom 401(k) plan may be a better alternative for small businesses and their employees’ futures. Compare the advantages of CalSavers to a private 401(K) such as those offered by Ubiquity and determine which choice is right for your company’s needs, culture, and bottom line.

How much will you pay for 401(k)? Get an instant quote.

How many employees do you have?
I am a sole proprietor
(just me/or my business partner/spouse)

How Will CalSavers Help to Increase Retirement Savings for California Workers?

Studies from similar legislative incentives in other states show that programs like CalSavers will:

  • reduce employee costs for participating in retirement plans and
  • increase overall participation in those plans by employees of small businesses.

In Oregon, retirement legislation went into effect in 2018. Between its rollout and 2021, total retirement assets held in the state-sponsored program increased from $3.5 million to more than $113 million.

The CalSavers program gives California businesses that have as few as five employees a state-sponsored option for a payroll deduction retirement plan. Employees that participate in the California plan can contribute up to $6,000 per year into a state managed Roth IRA.

Contributions can be directed into a variety of vehicles, all of which are selected by CalSavers administrators:

  • targeted date funds
  • money market certificates
  • bond index funds
  • equity funds
  • balanced funds

This plan is essentially a bare-bones option for employees who want to save for their retirement but whose employers do not offer a separate payroll savings plan for that purpose.

What Are the Alternatives to the State Retirement Program?

As opposed to a state-run IRA, a private 401(k) plan allows for much higher contribution amounts. This means participants can save more each year and increase compound interest as they approach retirement age.

With the state plan, employees are typically maxed out at contributing $6,000/year, while they can save up to $20,500/year with a 401(k). The total potential savings are even greater for employers, who can save up to $61,000 a year with a 401(k). They achieve this by contributing a maximum of $20,500 as an employee and an additional $40,500 as employer. Furthermore, offering a benefits package that includes a 401(k) with a high contribution limit gives companies a way to stay competitive in the hiring market.

Companies that choose the state plan may also be missing out on significant tax benefits from the government. Because of the SECURE Act, small businesses can earn $16,500 in tax credits ($5,500/year for the first three years) by sponsoring a 401(k) for their employees that includes auto-enrollment. These tax credits – which can be used to cover most of the cost of starting your own retirement savings plan – are NOT available to companies that opt-in to CalSavers.

Additionally, the state plan charges asset-based fees, which means that your employees are penalized for saving more – i.e., the more assets they save, the more fees they are charged. By contrast, flat-fee 401(k)s are more transparent and charge the same fee no matter how much your employees’ assets accumulate. This can add up to a big savings in the long run.

For employers and employees who prefer to have some degree of control over how their savings are invested, small business 401(k)s offer customizable investment lineups. No such option is available with the state plan, where the state mandates how savings are invested.

 

 

As a financial advisor, you maintain a laser focus on helping your clients build and grow wealth.

Offering your clients an outsourced retirement plan through a trusted 401(k) provider can help you avoid taking on new work and additional risk while maximizing your client’s 401(k) contributions, reducing their tax liability and taking advantage of the SECURE Act business tax credits.

But how can you get busy clients to pay attention to one more thing?

A comprehensive email campaign can be your key to opening those doors. And we don’t mean just one email – below, we’re giving you a series of emails that follow one another with thoughtful questions, valuable answers, and compelling calls to action. This is what gets your clients to take a look. Use these templates and personalize them for your own book of business.

  • Email 1: High-level introduction. Why are you reaching out to them?

Hi [First Name],

I’m pleased to let you know that I am now able to offer retirement plans for small businesses like yours. Now it’s easy to give your employees the retirement plan options they want without the cost, risk, and administrative burden of a traditional 401(k).

Improve employee satisfaction, retention, and recruitment while helping your team save for the future.

I’d love to set up a brief call to share how a 401(k) plan can help your small business. [Insert your contact info here.]

Best,

[Your Name]

  • Email 2: Expand on value & differentiate

Hey [First Name]!

In my work as an advisor, I specialize in [list 1–2 differentiators here. Be specific and concise – the goal is no more than two brief sentences.]

However, I am adding a new offering that is specially designed for small businesses like yours: a small business 401(k) plan through Ubiquity Retirement + Savings®. They have helped thousands of small business owners and employees save over $3 billion over the past 20 years.

Did you know that you can use tax credits to fund the program? I’d like to show you how that works. Just click my calendar to schedule some time that’s convenient for you. [link to your calendar].

Best,
[Your Name]

  • Email 3: Reminder

Hi [First Name],

I’ll keep this brief. I know your small business could benefit from offering a retirement plan. When you set this up, the tax credits alone may pay for the program.

And as a small business owner, you can put away up to $61,000 for your own retirement this year (or $67,500 if you are age 50 or older).

Want to hear more? Just hit “reply” and let me know.

Thanks,
[Your Name]

  • Email 4: Offer Personalized Support

Hi [First Name],

I’ve partnered with Ubiquity Retirement + Savings® to bring retirement options to small business owners like you.

Ubiquity’s experienced sales team provides one-on-one, personalized coaching. We walk through the process with you, unraveling complexities and delivering advice based on best practices, for a customized, turnkey retirement plan that meets your goals and saves you time.

Are you interested in a brief conversation about your plan? About 20 minutes will do it – just grab some time when it’s convenient for you: [link to your calendar]

Thanks,
[Your Name]

  • Email 5: Final outreach/Meeting request

Hi [First Name], I know you’re busy.

I’d like to show you how you can retain and reward your employees while qualifying for small business tax credits with an affordable retirement plan.

Can we connect for 20 minutes? [link to your calendar]

Best regards,
[Your Name]

Finalize and Scale

Once you have personalized and perfected the emails to your satisfaction, you can start sending them to your clients in batches. Start small, in groups of perhaps 10, so you can get a sense of response volume.

Be mindful of timing. Some periods will naturally be busier than others, such as tax season, so you don’t want to waste an opportunity by reaching out when your clients won’t have time.

If you’d like to learn more about our retirement plans, please visit the Ubiquity website or contact us today at 855.401.4357, Option 4.

There are many reasons that employers would want to offer 401(k) matching contributions to their employees’ retirement funds: It’s not only a great way to reward loyal employees and reduce turnover, but it also helps attract new talent for whom a competitive benefits package is a must. But how do employers know if they qualify to offer a 401(k) match?

The ability to offer a 401(k) company match depends upon:

  • Your plan
  • Employee eligibility
  • Annual IRS limit
  • Employee compensation
  • Vesting schedules

Your Plan

The terms of a 401(k) match may vary considerably. The plan you drew up with the plan administrator will detail the exact formula and stipulations. As the employer, you may change the terms at any time, though you will need to provide notice to all employees within 60 days of making the change.

A typical match is 25%, 50%, or 100% of the employee’s contribution amount, up to a limit of total employee salary. For instance, one common formula is 100% match on the first 2% of contributions, and 50% match on the next 4%.

If your plan includes additional non-elective deferrals or profit shares that are not included in the match formula, you will need to factor these amounts into the overall IRS limit calculation to ensure you do not exceed it.

How much will you pay for 401(k)? Get an instant quote.

How many employees do you have?
I am a sole proprietor
(just me/or my business partner/spouse)

Employee Eligibility

Employees can be eligible to receive an employer’s 401(k) match if they:

  • Are at least 21 years of age.
  • Have completed at least 1,000 hours of service over the last 12 months.
  • Have worked 500 hours or more hours for three consecutive years.

2022 IRS Limit

Employees are allowed to contribute up to $20,500 toward their 401(k) plans in 2022—with an additional $6,500 allowed for employees aged 50 or older.

Employer matches are provided on top of this amount, but the total combined employer/employee amount cannot exceed $57,000 (up to age 50) or $63,500 (age 50 or older).

Up to 100% of an employee’s salary may be contributed as a 401(k) match bonus—or the IRS limit, whichever comes first.

Employee Compensation Limits

The IRS adjusts the maximum employee compensation limit each year based on the cost of living. For 2022, the limit has increased to $305,000, meaning any amount of compensation above this amount isn’t eligible for contribution.

Employees earning more than the limit can contribute their maximum salary deferral, with the employer’s matching contribution applying up to this limit. So, if you’re earning $400,000 and your employer offers a 5% match on your contributions, your employer match will be limited to $15,250 (5% of $305,000) instead of $20,000 (5% of $400,000).

It’s also important to consider matching contributions for Highly Compensated Employees (HCEs). Any employee who owns over 5% of the business or who makes more than $135,000 in 2022 is considered to be an HCE. In order for the plan to remain ERISA compliant, HCEs cannot contribute more than 2% more of their salary than the average non-HCE.

Vesting Schedules

Some small business 401k plans are drawn up to include immediate vesting, but more commonly, employers create a vesting period ranging from one to six years that uses the money saved by not vesting short-term employees to reward loyal, long-term employees. Individuals who leave the company before the match kicks in do not receive any employer funds. Employees may contribute to their own accounts as they please. However, employer vesting can occur gradually or all at once.

Ubiquity has a long track record of helping employers and employees get the most out of their small business retirement plans. Reach out today to learn how easy it can be to start a low-fee 401(k) with company matching funds.

401(k) Hardship Withdrawal Rules 2022

Siân Killingsworth / 5 May 2022 / 401(k) Resources

Illustration of hand receiving money from a machine.

The CARES Act of 2020 allowed up to $100,000 in early hardship withdrawal distributions from 401(k) and IRA retirement savings plans without the usual 10% penalty. However, the IRS discontinued the early pandemic program on December 20, 2020, and it is no longer available in 2022. If you are currently experiencing financial hardship, options still exist, but borrowing from your retirement should be treated as a last resort.

When to Make a 401(k) Hardship Withdrawal

A hardship withdrawal may be useful when a bankruptcy filing or foreclosure on your house appears imminent. It can also be better than a high-interest loan. Common reasons to withdraw 401(k) funds early include:

  • Medical bills
  • Purchase of a primary residence
  • Avoiding foreclosure on a primary residence
  • Educational expenses
  • Funeral expenses
  • Natural disaster home repairs

How much will you pay for 401(k)? Get an instant quote.

How many employees do you have?
I am a sole proprietor
(just me/or my business partner/spouse)

How Early Retirement Plan Withdrawals for Hardship Work

Normally, you’ll need to check with your HR department or plan sponsor to find out if a 401(k) hardship withdrawal is available. Not all plans allow it. If the withdrawal is allowed, you may be asked to demonstrate an “immediate and heavy” financial need and prove that you lack the assets to cover it.

Once approved, you’ll have to add the amount onto your taxable income for the year and may be subject to 10% penalty if under age 59.5. Usually, the IRS withholds about 20% of a withdrawal to cover taxes, so if you take out $10,000, you may only receive $7,000 after the tax withholding and penalty.

On top of that, you’ll be losing out on all the gains and compounding interest you would’ve received by keeping your money in the account. Assuming a 9.6% annual return, someone in their thirties borrowing $10,000 from a 401(k) could be losing more than $117,000 in total returns, according to Forbes.

Furthermore, creditors on the lookout for asset recovery could potentially go after any money they see sitting in a checking account. However, they are not permitted to touch money left in a 401(k). For these reasons, early 401(k) withdrawals are generally not recommended.

401(k) Hardship Withdrawal Rules 2022 At-A-Glance:

  • $ Amount Available: $50,000
  • Proof of Hardship: Y
  • Withdrawal Taxable: Y
  • Withdrawal Penalty: Y/N – depends on the circumstances
  • Repayment: N

How Much Can I Borrow With a 401(k) Hardship Withdrawal in 2022?

Plans that allow early distribution in 2022 let you borrow only what is necessary to cover the cost of the stated expense. This maximum includes all tax-advantaged retirement savings funds like IRAs, 403(b)s, and other 401(k)s.

Alternatives to 401(k) Hardship Withdrawal in 2022

The sun has already set on early COVID-related tax relief, though you may consider alternate options like:

  • Cutting back on everyday living expenses
  • Transferring expenses to a 0% interest credit card
  • Tapping emergency savings, tapping a brokerage account, or
  • Taking out a 401(k) Loan

How Are 401(k) Loans Different Than 401(k) Hardships?

The main difference between 401(k) hardships and 401(k) loans is your ability to repay. In most cases, the loan amount will be limited to $50,000 (or 50% of your balance), and you’ll need to repay the money within five years at a low interest rate.

If you leave your job before paying back the loan, you’ll have until Tax Day of the subsequent year to repay the entire loan. Otherwise, the full balance will be taxed and penalized as a withdrawal. On the other hand, 401(k) hardships do not need to be repaid and are not charged interest.

What Is the Rule of 55?

The “Rule of 55” allows early distribution as early as age 55, penalty-free, so long as you’re retiring from the workforce and not simply changing employers. If you’re 59.5 or older, you can take regular 401(k) distributions without penalty, though they’ll be taxed as income unless your distribution is from a Roth source.

How Are My Taxes Different In 2022 If I Took Out a CARES Act Loan in 2020?

Just over 5% of 401(k) plan participants took advantage of the CARES Act of 2020’s special withdrawal rules. These rules redefined hardship for people diagnosed with COVID-19 or whose spouse/dependent had been diagnosed with COVID-19, as well as people with financial issues due to quarantine, furlough, lay-off, lack of access to childcare, or reduced business operations.

These withdrawals had to be made before December 30, 2020. Borrowers were expected to pay regular taxes on the withdrawal in most cases, but the income could be spread out evenly over the 2020, 2021, and 2022 tax years to minimize the impact. So, if you took out one of these early hardship withdrawals, you may need to file an amended tax form this year and next indicating additional income provided by the hardship withdrawal.

Get Your 401(k) Back on Track After a Hardship Withdrawal

Someone between the ages of 30-50 can get a 401(k) back on track after a hardship withdrawal by boosting retirement savings as little as 1% per paycheck. Borrowers between ages 50-70 may need a more aggressive savings plan, depending on how much was borrowed and how soon they want to retire.

What is the CalSavers June 2022 Deadline?

Siân Killingsworth / 19 Apr 2022 / 401(k) Resources

deadline calendar

Soon nearly all employers in California will need to offer a retirement plan or default to the state-run program. The CalSavers deadline is fast approaching on June 30, 2022—meaning all businesses with five or more California employees aged 18 or older must comply or face penalties.

Employees can opt out of the program at any time, but eligible employers cannot withdraw unless they are establishing their own qualified retirement plan. Now is a good time to explore alternatives like 401(k) retirement plans for your small business in California.

How much will you pay for 401(k)? Get an instant quote.

How many employees do you have?
I am a sole proprietor
(just me/or my business partner/spouse)

Who Must Register Employees for the CalSavers Program?

Your business will need to register for the CalSavers program by June 30, 2022, if:

  • You have five or more California-based employees over age 18
  • You do not offer your own company pension or 401(k) retirement plan

You will need to visit the CalSavers website to either register for the state-sponsored IRA program or file an exemption if you are offering a private-market alternative like a 401(k). If you are participating in CalSavers, you’ll have up to 30 days after registration to add employees to the roster. Some light ongoing maintenance may be required.

What Were the Previous CalSavers Retirement Plan Deadlines?

The CalSavers retirement plan has been a couple years in the making:

  • September 30, 2020, was the first deadline for companies with over 100 employees
  • June 30, 2021, was the second deadline for companies with 51 to 100 employees
  • June 30, 2022, is the third deadline for companies with five to 50 employees

What Happens If Companies Miss the CalSavers Deadline?

Close to 400 companies in the first wave missed the 2020 deadline. The state began penalizing these companies as of January 2022.

The Franchise Tax Board will assess a penalty of $250 per eligible worker on companies with more than 100 employees. The penalty will triple for companies that fail to comply within 90 days.

Businesses Don’t Have to Wait Until June to Get Started with a Retirement Savings Plan

Many businesses are foregoing the CalSavers program, instead taking this opportunity to offer their workers a company-sponsored 401(k) retirement plan that they own and control. After all, the CalSavers account doesn’t serve as an incentive for employee retention, as it transfers in the event of a job change.

How Does CalSavers Work?

Employees receive 30-day notice of auto-enrollment, at which point they can accept or change the standard deduction or opt out of the plan entirely. CalSavers Roth IRAs auto-enroll starting at 5% the first year, increasing 1% annually until reaching 8% in the fourth year, though workers can adjust the number up or down.

The maximum contribution is $6,000 for workers under 50 or $7,000 for workers age 50 and older. Investments are made into a simple target date fund with 0.825% to 0.95% AUM fees. Employees pay tax on the money up front, but do not owe taxes when the money is withdrawn in retirement.

Why Isn’t There a CalSavers 401(k)?

Even though 401(k)s are popular retirement savings vehicles, the government cannot order private enterprises to offer a CalSavers 401(k), as per the federal Employee Retirement Income Security Act of 1974 (ERISA). CalSavers IRAs were challenged as a violation of ERISA, but the 9th Circuit Court of Appeals ruled in May 2021 that CalSavers was a “state-run program,” not a mandatory employer-provided benefit.

Why Choose a 401(k) Plan Instead of CalSavers?

A privately sponsored 401(k) plan allows workers younger than 50 the ability to save up to $20,500 in 2022. If you’re age 50 or older, you can sock away an extra $6,500. While not every worker will be able to hit the maximum contribution limit, business owners and top executives can maximize their retirement assets this way.

It’s a common misconception that 401(k)s are too costly for small enterprises. Ubiquity is a plan administrator focusing exclusively on affordable, easy-to-manage small business 401(k)s.

Contact us for details on how you can set up a new program for one low monthly flat fee.

If you are considered a Highly Compensated Employee (HCE) in 2022, your maximum 401(k) contribution is the same as anyone else’s–$20,500 plus an additional $6,500 in catch up contributions if you’re age 50 or older. Employers can contribute an extra $40,500 if the plan allows it.

However, employers will also need to consider annual nondiscrimination testing requirements for a fair and balanced plan, so they may not be able to contribute this maximum to highly compensated employees in the top 20% who make $135,000 or more.

What is a Highly Compensated Employee in 2022?

A Highly Compensated Employee in 2022:

  • Owns more than 5% of the company at any time during 2021 or 2022
  • Earns over $135,000 in 2022
  • Falls in the top 20% of employees by compensation (if the employer makes a top-paid election)
  • Earns “compensation” that includes paycheck income, overtime, bonuses, commissions, and any 401(k) salary deferrals

Examples of Highly Compensated Employees in 2022

The rules can be confusing because they depend on how the plan is drawn up. Here’s an example to consider.

In a ten-person small business:

  • CEO Mary earns $500,000 and owns 90% of the company: HCE
  • Brett earns $350,000 and no ownership: HCE
  • George earns $200,000 and no ownership: HCE unless the company makes a top-paid election
  • Jane earns $70,000 and owns 10% of the company: HCE
  • Six other employees earning $40,000 or less: Not HCEs

Most of the time the rules are obvious, but some employees’ status is harder to determine. It depends on whether the employer elects for the top-paid rule to apply in order to pass their nondiscrimination assessment by reducing the number of individuals in the highly compensated group.

How much will you pay for 401(k)? Get an instant quote.

How many employees do you have?
I am a sole proprietor
(just me/or my business partner/spouse)

What’s Changed with 401(k) Plans from 2021-2022?

In many ways, 401(k) plans have changed since last year:

  • The maximum employee contribution limit increased $1,000
  • The maximum employer contribution limit increased $3,000
  • The employee limit for calculating contributions increased $15,000
  • The key employees’ compensation threshold for top-heavy testing increased $15,000
  • The highly compensated employees’ threshold for nondiscrimination testing increased $5,000

There was no change to the catch up compensation amount.

How High Earners Impact a 401(k) Plan’s Compliance With ERISA

The Employee Retirement Income Security Act of 1974 (ERISA) is a federal law ensuring fair and equal opportunity access to company-sponsored retirement plans. Employers must pass annual nondiscrimination tests to show their plan benefits all employees—not just so-called “Highly Compensated Employees.”

Generally speaking, HCEs should contribute no more than 2% higher than the percentage Non-Highly Compensated Employees are contributing. So, if non-HCEs are putting in 5% of their combined salaries into the plan, the HCE group could contribute a maximum of 7% of their combined salaries.

What Can Employers Do to Save More in 2022?

Employers who personally want to save more in a small business retirement plan – and perhaps reward some of the top employees in their ranks – may consider adding a Safe Harbor provision and employer contributions to the retirement plan. By bringing up the combined total of the non-HCE group, HCEs will be able to contribute more to their plans.

What Can Employees Do to Save More in 2022?

Highly-Compensated Employees have other options to save for retirement aside from funding a 401(k) to the max. Individuals can put up to $3,650 into an individual Health Savings Account or $7,300 into a family HSA, plus an extra $1,000 if they’re age 50 or older.

High earners can also invest unlimited amounts into stocks, bonds, mutual funds, exchange-traded funds, and real estate investment trusts. Though they will have to pay capital gains taxes on the earnings and taxes on the money invested, the returns can certainly provide supplemental retirement income.

Contact Ubiquity to learn about different types of small business retirement plans so you can find one that best suits your needs. A small business 401(k) is affordable when you receive full administrative support for one low, affordable, transparent monthly fee that stays the same, even as your plan grows in participation or total balance.

 

 

2022 401(k) Catch Up Contribution Rules

Siân Killingsworth / 18 Apr 2022 / 401(k) Resources

Self Employed business woman at desk

If you’re turning 50 years old in 2022, you can put an additional $6,500 into a Solo 401(k) or small business 401(k) plan. Reaching this important retirement savings milestone not only saves you more than $1,000 on your tax bill, but earns you investment returns and compounding interest, all tax-shielded.

While the 401k catch up contribution in 2022 has not changed from 2021, maximum 401(k) contributions increased $1,000 to $20,500 this year. That means, including your catch up contribution, your 2022 401(k) savings limit will be $27,000.

Are 401(k) Catch Up Contributions Increasing in 2022?

The answer is NO — the 401k catch up contribution limits for 2022 will remain the same. Since 2020 through the present, $6,500 in catch up contributions are allowed.

What Is the Maximum 401k Catch Up Contribution for 2022?

You can begin making catch up contributions on January 1st the year you turn 50. The max 401(k) catch up contribution for 2022 is $6,500.

To take full advantage of your 401(k) savings vehicle and hit that $27,000 goal for 2022, you’ll need to reserve $519.23/week or $2,250/month. Even if you are not able to hit this target, saving at least enough to obtain your employer’s 401(k) match is an excellent start.

How Much Can You Save in a SIMPLE 401(k) With a Catch Up Contribution for 2022?

SIMPLE 401(k)s for small businesses with fewer than 100 employees can be easy to administer and are not subject to annual nondiscrimination testing, though employers must contribute and fully vest employees in the plan.

If you are 50 or older with one of these plans, you can save an extra $3,000 in catch up contributions – a figure that has remained the same since 2015. For 2022, the maximum limit for a SIMPLE 401(k) is $14,000 – meaning those aged 50 and older can save up to $17,000, including the catch up.

How much will you pay for 401(k)? Get an instant quote.

How many employees do you have?
I am a sole proprietor
(just me/or my business partner/spouse)

Are Employer 401(k) Contributions Rising in 2022?

Most employers contribute to employee retirement savings. This allows business owners and key employees to contribute more to their own savings accounts, so it’s a win-win for everyone. On top of the $20,500 employees can potentially contribute to their accounts, employers can also put in an extra $40,500 for themselves, bringing the total to $61,000 in 2022. Of course, the exact amount depends upon the employer’s match formula or nonelective contribution rate. This ceiling increased by $3,000 from 2021.

For those age 50 or older making the additional $6,500 catch up contribution, the maximum combined employer/employee 401(k) contribution for 2022 is $67,500.

How Much Can Solo 401(k) Savers Put Away for Retirement?

When you’re age 50 or older with a Solo 401(k), you can contribute to the $67,500 2022 maximum as you are both employer and employee. Best of all, your spouse can also contribute to the plan, effectively doubling your tax savings for the year to a max of $135,000 if you’re both over 50. Of course, people under 50 still enjoy these tax advantages, too – just less the $6,500/person catch up contributions.

When Are Taxes Due on 2022 Retirement Savings?

Households can deduct their 401(k) contributions from their taxable income for 2022 and pay taxes upon 401(k) withdrawal in retirement. Currently, the 401(k) distribution rules do not require you to remove money from your account as Required Minimum Distributions until you are 72 years of age. While you can opt to withdraw money as early as age 55 in some cases, the longer your cash sits, the more profits and compounding interest you earn.

Do Roth 401(k)s Allow Catch Up Contributions?

YES, a Roth 401(k) allows you the same $6,500 catch up contribution. While you won’t get the immediate tax break that a Traditional 401(k) plan provides, you also don’t have to pay tax on the investment growth of that extra $6,500/year.

You’re free to withdraw this money — without tax or penalty — once you are 59 ½ years old and you’ve been contributing to the account for at least five years. Qualified withdrawals can also be taken if you become disabled or you pass away and leave the money to beneficiaries.

What Types of Retirement Accounts Allow Catch-Up Contributions?

In addition to 401(k) accounts, you may also contribute catch up amounts to:

  • 403b
  • Governmental 457b
  • Roth IRAs
  • SARSEP
  • SIMPLE IRAs

Should You Make the 401(k) Catch-Up Contribution in 2022?

Setting aside $6,500 today doesn’t equate to $6,500 retirement. By the time you need the money, it will be worth so much more. Even if you haven’t saved aggressively up to this point, the catch up contribution is designed to help get you where you need to be in a relatively short period of time. Here’s how a 401(k) catch up scenario might work.

  • You and your spouse earn $130,000/year, which puts your household in the 22% tax bracket. You each save the standard $20,500 plus $6,500 in catch up contributions. Ordinarily, you’d owe $28,600 in taxes
  • If you save the maximum for your 401(k)s, you’ll be paying taxes on $76,000 worth of income – bringing you down to the 12% tax bracket and decreasing your tax burden to $9,120 (-$19,480)
  • The catch up contributions alone produce a $1,430 tax discount
  • You can also put away up to $14,000 into a Roth IRA at a 12% rate, paying just $1,680 in taxes
  • All told, you can save $1 million by full retirement age this way

Had you opted out of the catch up contributions, you could have amassed over $50,000 in lost savings once investment returns are factored in. The impact is even more significant at higher tax brackets.

So, the answer to “Is the catch up contribution worth it?” is a resounding YES!

How Can You Set Up a 401(k) and Start Making Catch-Up Contributions?

Thanks to catch up contributions, it’s never too late to start saving for your future. If you want to set up a new solo or small business 401(k) account to enjoy all the benefits of tax-advantaged savings — including catch up contributions — the 401(k) contribution deadlines generally go as late as December 31st, 2022, with contributions allowed until next year’s tax deadline.

Contact Ubiquity to learn more about plan setup and administration for a flat transparent monthly rate with no AUM or per-person fees.

 

close

Read Ubiquity’s 3 Steps to Building Financial Security in an Economic Downturn

Read Now
Read the Definitive Guide to Small Business 401(k)
Download Your 401(k) Guide Now

© 2022 Ubiquity Retirement + Savings
Privacy Policy
Do not sell my info
44 Montgomery Street, Suite 3060
San Francisco, CA 94104
Support: 855.401.4357

Facebook Twitter LinkedIn YouTube

© 2022 Ubiquity Retirement + Savings
Privacy Policy
Do not sell my info
44 Montgomery Street, Suite 3060
San Francisco, CA 94104
Support: 855.401.4357

Credit Card Logos
Show Exit Modal