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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

Start the New Year With a 401(k)

Siân Killingsworth / 15 Dec 2022 / 401(k) Resources

Group of friends enjoying out with sparklers. Young men and women enjoying new years eve with fireworks.

Start the New Year off right by launching a retirement plan for your small business to help you and your employees meet savings goals for your golden years. A 401(k) can help you attract and retain employees in the coming year and starting a plan on January 1 has numerous benefits.

Here’s why ringing in 2023 with a 401(k) makes so much sense:

401(k) plan contribution limits are going up

Every year, 401(k) contribution limits tend to rise with inflation. After a year of record-setting inflation, we’re poised for a record-setting 401(k) limit increase as well. For 2023, individuals can set aside $2,000 more in personal retirement savings (up to $22,500); this is up from $20,500 in 2022.

As a small business owner in 2023, you can contribute to your own account as both employee ($22,500) and employer ($43,500) to save a total of $66,000.

If you’re over 50, you can submit a $7,500 catch-up contribution—up $1,000 since 2022—on top of the $66,000 maximum, bringing the grand total to $73,500.

With a traditional account, that means you can deduct up to $73,500 off your taxable income for the year. If you’re making contributions on behalf of your employees, you can deduct those amounts off your business tax liability for the year as well.

Another option—if you think you’ll be in a higher tax bracket after you retire—is to pay your taxes up front with a Roth account and pull tax-free money out in retirement.

You have more time than you think

December 31st used to be the deadline for businesses to adopt a new 401(k) plan, but the SECURE Act has brought about positive changes and generous extensions. Now you have until March 15th, 2023 to adopt a traditional 401(k) plan for 2022 if you’re taxed as a Partnership or S-Corp or until April 15th, 2023 if you’re taxed as a Sole Proprietorship or C-Corp. If you file an extension, you can have until September or even October to adopt a plan and invest for the previous year. The caveat to this is, when opening a 401(k) plan for 2022, while in 2023, you are only allowed to contribute discretionary Profit Sharing however this could get you up to $61,000 in employer contributions that can be deducted on your 2022 taxes.

You also have until December 31st, 2023, to convert a traditional 401(k) plan into a 4% nonelective Safe Harbor plan dating back to the 2022 plan year. This comes in handy if your plan fails nondiscrimination testing for 2022 and you want to avoid corrective refunds.

Additionally, if you start a plan in 2023 without Safe Harbor and decide that you would like to add it in the middle of the 2023 plan year, you can! You have up until December 1st, 2023, to add a 3% nonelective Safe Harbor for the full 2023 plan year allowing you to maximize your employee contributions without worrying about certain non-discrimination tests.

Kicking off a new 401(k) plan in January solves that problem

There is one silver lining to a late setup. While your employees may be unable to make all these salary deferrals for 2022, you can still have more time to decide whether to make a year-end profit-sharing contribution without worrying how you’ll pass IRS nondiscrimination testing.

That said, there is some administrative work to tackle, so it’s best to start sooner rather than later.

To set up a small business 401(k) in 2023, you’ll need to decide whether to assume full responsibility for the 401(k) in-house or work with an experienced plan provider who can help set up and maintain the plan. Most small businesses choose the latter.

You’ll need to decide on matters like:

  • 401(k) plan types
  • Eligibility requirements
  • Vesting schedules
  • Business contributions
  • Loan administration
  • Nondiscrimination testing
  • Investment decisions

On average, it takes 30-45 days to get a new 401(k) rolling, so there’s no time like the present to get started. Amid the Great Resignation, offering a 401(k) in 2023 is more important than ever; 84% of employers believe1 offering financial wellness tools like 401(k)s increases employee retention. Given that just 58% of small businesses offer 401(k) benefits2, it’s still a differentiating factor in attracting talent.

Interested in 401(k)s for your small business? Contact Ubiquity to learn more.

 

Ubiquity is not a registered investment advisor and no portion of the material herein should be construed as legal or tax advice. Please consult with your financial planner, attorney and/or tax advisor for advice.

1 Bank of America, 12th Annual Workplace Benefits Report, “Navigating a New Era of Financial Wellness,” 2022.

2. https://www.prnewswire.com/news-releases/survey-small-business-owners-still-resistant-to-starting-a-401k-plan-only-one-in-four-currently-offer-as-an-employee-benefit-301544021.html

What’s the secret to successful 401(k) investing? For many people, a 401(k) retirement account is their largest asset, perhaps worth more than their home. Successful 401(k) investment can mean the difference between a comfortable retirement or a struggle once you stop working.

The types of 401(k) plans for small businesses and sole proprietors don’t differ much from the plans for larger companies in the way they work. The latter is just more complex. Individual, solo, and self-employed 401(k) plans for small businesses and sole proprietors are very similar. In a self-directed 401(k) plan, employees choose where to invest their money rather than rely on the employer to decide where to invest these funds.

Want to know how to best manage your small business retirement plan? Here are six 401(k) secrets you need to know:

 

1. Take Advantage of 401(k) Matching 

One of the major advantages of 401(k)s is that many companies offer employees a match. This is free money and an ideal way to save. Typically, companies match up to 6 percent of employee contributions. 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. Specific terms of a 401(k) retirement plan can vary. The plan document will contain details on how your company’s 401(k) works.

 

2. Contribute Up to the Limit 

Contribute as much as you can to your 401(k) each year. For 2023, those younger than 50 can contribute up to $22,500. Those age 50 or older can put in an additional $7,500 in catch-up contributions. Maxing out your contributions can play a huge role in the quality of your retirement. Review all the 2023 limits here.

 

3. Diversify, Diversify, Diversify 

It’s impossible to overstate the importance of diversification when it comes to your 401(k). Spreading risk is the basis of successful investing, and that certainly includes your 401(k). A mix of stock and bond funds, rebalanced regularly to reflect your risk tolerance as you get closer to retirement, is the easiest way to diversify.

The federal government takes investment fiduciary responsibilities very seriously. Businesses are subject to Department of Labor (DOL) audits and investigations to verify that their retirement plans offer responsible investment options with reasonable fees. If they don’t, the business can face stiff penalties, as well as litigation from any employees who are paying excessive fees or have too few investment options that adequately match their risk-tolerance profile.

For all these reasons, more businesses are choosing retirement plans with 3(38) investment fiduciary services, such as a Ubiquity Censibly Yours plan in order to access a greater variety of investment options.

 

4. Vesting Incentivizes Employees to Stay 

It’s in the best interest of employees to remain employed for at least as long as it takes to become fully vested in their 401(k). Otherwise, they lose all or most of the match from their employer. Employers have the ability to choose the rate of vesting, and many select a one-, two-, or up to six-year employment requirement for vesting eligibility.

 

5. Don’t Touch Your 401(k) Until Retirement 

Yes, emergencies happen. When circumstances are dire, you may have no choice but to tap your 401(k) to pay expenses. However, doing so is always a last resort as it could significantly affect your retirement.

While it’s possible to take out 401(k) loans, you’ll incur fees and penalties if you fail to repay. On the other hand, if you take a hardship distribution in the event of a financial emergency, it is not a loan, so you cannot put the money back into your 401(k) later.

If you cash in your 401(k) prior to retiring, expect to pay taxes. The money is not tax-deferred. If you take withdrawals prior to reaching age 59.5, you may get hit with a 10% early withdrawal penalty as well as paying income taxes.

Some people plan to keep working well into their retirement years to make up for their lack of retirement planning and saving. However, working longer may not be an option. Many current retirees say they had to retire earlier than they planned because of health problems or unforeseen changes within the company they were working for. Taking steps today to prepare for what you want to happen in the future will leave you better prepared to handle surprises along the way.

 

6. Think Long-Term 

A 401(k) isn’t a short-term investment and shouldn’t be treated that way. Develop a long-term investment strategy with the help of a financial advisor and review your portfolio annually, if not quarterly. Chasing the hot stock or sector of the moment isn’t usually an effective strategy. Attempting to time the market is a great way to lose money, while staying the course and sticking to your goals is a smart way to avoid emotion-driven, impulsive decisions that may derail your retirement.

Customized 401(k) plans for small businesses do more than help you and your employees save for retirement. These plans help you attract and keep employees. For more information and to schedule a free consultation, contact Ubiquity.

 

Ubiquity is not a registered investment advisor, and no portion of the material herein should be construed as legal or tax advice. Please consult with your financial planner, attorney and/or tax advisor for advice.

 

Wonder how much you can save for your retirement in 2023?

Download the Ubiquity Retirement + Savings 2023 Contribution Guide

The IRS has announced the 2023 contribution limits for retirement and health savings accounts. This includes contribution limits for 401(k) and 403(b) plans, income limits for IRA contribution deductibility, and the salary threshold to classify key and highly compensated employees. 

Good news! Contribution limits for individual retirement accounts (IRAs) will increase from 2022 to 2023, and even more so for retirement savers who participate in a workplace employment plan like a 401(k). 

Let’s take a look at the updated limits below: 

2023 401(k) and 403(b) Contribution Limits  

Maximum employee elective contribution (age 49 and younger)

$22,500

Maximum employee elective contribution (age 50 and older)

Additional $7,500

Maximum employee elective deferral plus catch-up contribution (age 50 or older)

$30,000

Defined contribution maximum limit, employee + employer (age 49 or younger)

$66,000

Defined contribution maximum limit (age 50 or older), all sources + catch-up

$73,500

Highly compensated employees’ threshold for nondiscrimination testing

$150,000

Key employee officer compensation threshold

$215,000

Annual compensation limit for HCEs and Key Employees

$330,000

 

 

The IRS has also set limits for the total amount that may be contributed to your retirement savings 401(k) account from all sources combined (IRS section 415 limit). This includes any employer matching or profit-sharing contributions, and any employee after-tax contributions. For 2023, this limit has increased from $61,000 to a new maximum of $66,000. 

Every plan is different, so it’s important to refer to your Plan Document for any compensation or other applicable limits. 

2023 Roth and Traditional IRA Contribution Limits

Roth and traditional IRA contribution limits (age 49 and younger)

$6,500 (must have earned income)

Roth and traditional IRA contribution limits (age 50 and older)

Additional $1,000

IRA modified adjusted gross income limit for partial deductibility: Single

$73,000 – $83,000

IRA modified adjusted gross income limit for partial deductibility: Married, filing jointly

$116,000 – $136,000

IRA modified adjusted gross income limit for partial deductibility: Married, filing separately

$0 – $10,000

IRA modified adjusted gross income limit for partial deductibility: Non-active participant spouse

$218,000 – $228,000

Roth IRA modified adjusted gross income phase-out ranges: Single

$138,000 – $153,000

Roth IRA modified adjusted gross income phase-out ranges: Married, filing jointly

$218,000 – $228,000

Roth IRA modified adjusted gross income phase-out ranges: Married, filing separately

$0 – $10,000

SIMPLE IRA contribution limits (age 49 and younger)

$15,000

SIMPLE IRA contribution limits (age 50 and older)

$19,000

 

2023 Health Savings Accounts (HSA) Contribution Limits 

Health savings accounts (HSA) contribution limits: Individual (employer + employee)

$3,850

Health savings accounts (HSA) contribution limits: Family (employer + employee)

$7,750

Health savings accounts (HSA) contribution limits: Age 55 or older

Additional $1,000

 

 

**Catch-up contributions can be made at any time during the year in which the HSA participant turns 55.

If you need more detailed guidance, see IRS Notice 2021-61.

 

The retirement plan market has become more crowded in recent years, underscoring the difficulty of finding the right 401(k) provider for your small business. Exercise due diligence before you choose a small business 401k provider, taking into consideration:

  • Employer involvement
  • Plan features and benefits
  • Fees and costs

Services and prices can vary widely, so it’s worth the time and effort to make a well-researched decision.

Employer Involvement

Much behind-the-scenes work goes into providing a stellar front-end experience for your employees. As the employer sponsoring the plan, you’ll need to answer a few questions about how you’d like the plan designed. For instance, you’ll need to decide whether you’d like to offer traditional (before-tax) and/or Roth (after-tax) contributions.

Ideally, you’ll find a 401(k) provider that handles day-to-day administration, IRS and DOL compliance, and investment management for one low fee. Your 401(k) provider will:

  • Write up the plan documents
  • Prepare participant disclosures and account statements
  • Process all loans and distributions
  • Ensure that the plan follows all federal rules
  • Assist in audits and conduct discrimination testing
  • Aid in employee enrollment
  • Answer employee questions
  • Prepare Form 5500 for annual filing with the DOL

Some third-party administrators act as investment advisors and managers, while others focus on administration and give you the freedom to work with a financial advisor of your choice. If you need a recommendation, a TPA can often point you in the right direction. Sometimes you can save money by unbundling these services.

Lastly, it’s worth considering that the best 401(k) provider offers fiduciary support — meaning they take on the personal, legal liability to make sound investment choices on behalf of employees. You may find 401(k) custodians that hold plan assets but do not assume any responsibility for helping you make management decisions.

401k Plan Features and Benefits

The best 401(k) providers offer flexibility. For starters, find an administrator that handles both traditional and Roth retirement plans for small businesses. Employees with traditional accounts have the opportunity to reduce their taxable income annually and grow returns tax-free until they withdraw the money years later in retirement — when their tax bracket is likely lower. On the other hand, young employees who plan to climb the ladder and get married in the future may prefer to pay their taxes now, while they’re in a lower tax bracket, and enjoy a tax-free retirement.

Beyond the traditional vs. Roth account decision, small business 401(k) providers may also offer Safe Harbor plan designs that can help you automatically pass nondiscrimination testing each year. While you will need to contribute to your employees’ accounts, employer matching and profit-sharing can also reduce your tax liabilities while making your benefits more enticing to top talent.

Plan providers should allow access to a broad selection of investment options, including a mix of large and small stocks, different types of bonds, emerging markets, and some international exposure. Some administrators may also offer creative solutions for boosting plan enrollment, such as employee auto-enrollment — which, as a bonus, also provides you with an added tax credit.

Fees and Costs

The best 401(k) providers offer their services with low-cost, transparent fees. True small business 401(k) providers charge a flat fee for administration services. Some providers may charge a percentage of the Assets Under Management — AUM fees — which increase as the popularity of your 401(k) plan increases. While a 1.68% AUM fee may seem trivial, it can become quite expensive over time. Other providers may charge per-person fees under the guise that it costs more to manage more accounts — yet, that’s just another way that you can be penalized for growing enrollment. Worse yet, many companies charge both AUM and per-person fees to nickel and dime you, so it’s worth looking around to find a provider who truly has your best interests at heart.

Investment fees must also be considered. Are you charged transaction fees? While the average transaction fee is around 1.44%, some are lower than 1% — which can save a considerable sum in the long run.

Looking at your total expense ratio can also help you figure out whether you’re overpaying on your investments. If your employees are charged a 1% expense ratio, that means they’re paying $1,000 for every $100,000 invested. With many of the larger and well-known providers, a small business can expect to pay a higher total expense ratio than a larger company; for instance, a business with 2,000 employees might pay 0.7%, while a small business with 50 employees might pay 1.68%. You can find a small business expense ratio below 0.7% with a 401(k) provider specializing in small businesses.

While built-in employee counseling services can be great, it’s worth taking pause before accepting higher fees in exchange for this service. Do you really need it? Ideally, your 401(k) provider will offer these services a-la-carte so employees who want this extra level of financial guidance can access it, but you’re not compelled to pay for a service no one ends up using. Most small business 401(k) providers offer employee portals with DIY tools and articles to help employees make informed financial decisions — and these resources are almost always free.

The Bottom Line

Many small business owners feel like they’re flying blind in selecting a 401(k) plan for their employees. The right small business financial advisors can change that. Making the right choice can result in employee engagement, low-cost benefits, and effortless administration. Create a spreadsheet to help compare apples to apples — measuring all the factors we’ve mentioned above — and get the right 401(k) your growing small business deserves. Contact Ubiquity to learn about the different types of 401k plans available to you.

 

 

Ubiquity is not a registered investment advisor and no portion of the material herein should be construed as legal or tax advice. Please consult with your financial planner, attorney and/or tax advisor for advice.

Along with competitive compensation and robust healthcare benefits, offering a retirement savings package such as a 401(k) is a crucial way for large and small businesses alike to attract and retain top talent.

Implementing a plan is more affordable than ever, and you’ll receive a tax credit for plan startup costs and a tax deduction for expenses paid.

But how do you start a 401(k) for your small business? Here’s a step-by-step overview of where to begin, along with answers to some common employer FAQs.

 

5 Steps to Starting a 401(k) for Your Small Business

The IRS heavily regulates the process of establishing and maintaining a 401(k). As a result, many small businesses outsource the job to a knowledgeable small business financial advisor to set up and administer the retirement plan throughout its life.

Still, every owner should understand the steps involved in starting their small business 401(k):

  • Decide Which Plan You Should Establish

Will you offer a traditional, simple, or safe harbor 401(k) plan? Or maybe a simple IRA plan is best for you. There are plenty of 401(k) plan types to choose from, so it’s essential to do your homework and determine the plan that fits your immediate needs and long-term goals.

  • Understand Your Fiduciary Responsibilities

While you’re not responsible for how your employee’s 401(k) selections perform, you are responsible for acting as a fiduciary. That means you’re legally bound to make choices about your 401(k) plan as a person who owes a duty of care and trust to your employees.

Part of acting on your fiduciary responsibilities is setting up a trust for your plan’s assets and appointing at least one trustee to manage the plan investments, distribution, and other activities. This helps ensure the funds’ use solely benefits your employees and their beneficiaries.

  • Draw Up a 401(k) Plan Document

This document outlines your plan’s details in compliance with the IRS. It should contain information including (but not limited to) details about your trust, fiduciaries, your contribution plans, and more.

  • Establish an Organized Recordkeeping Process

You’ve drawn up the plan document and cleared it with the IRS. Now, keeping meticulous records documenting the progress of that plan is essential, including information about plan values and employee contributions. In addition, you must regularly update your participants’ census and employment data to ensure they’re still eligible for their 401(k) benefits.

  • Create a Thorough Information Package for Your Plan Participants

The law requires that employers provide information to their participants about how the plan works, its features, and its benefits. It’s also essential to disclose information to both your employees and the IRS about any fees and investment changes (if applicable).

 

FAQs for Starting Your Small Business 401(k)

Q.) How much will it cost to set up a 401(k) for my small business?

Initial fees typically run anywhere from $500 to $3K. How much you’ll pay depends upon the type of benefits you choose, the size of your business, consultation fees associated with your retirement service provider (if applicable), and more. For more information, click here for the Department of Labor’s retirement plan fees and expenses guide.

Q.) How long does it take for a small business to set up a 401(k)?

That all depends upon how thorough you are. If you submit your plan with missing or incomplete information, it could mean several time-consuming rounds with an Implementations Specialist to get the correct information uploaded. You could also end up paying fees because of mistakes you accidentally made from rushing through the details of your plan.

Q.) How much should I contribute to the plan?

You can contribute as much as you’d like within IRS limitations. Remember that employer contributions are tax deductible on your small business’s federal tax returns. Just as importantly, think about the positive impact matching or profit-sharing will have on morale, your relationship with your employees, and your employee’s financial health.

Q.) How much should participants contribute?

Participants may contribute as much as they wish within IRS limitations. Encourage your employees to research the investment options available and educate them on the benefits of a 401(k) to help make comfortable retirement a reality.

Q.) What are the maintenance costs for maintaining a 401(k)?

Once you select a 401k for your small business and get it up and running, you’ll need to pay fees associated with ongoing operations, services, investments, and expenditures for matching contributions.

Starting a 401(k) promotes employee morale, which leads to improved retention and a better ability to attract new talent. It also helps contribute to your and your employees’ financial well-being. The knowledgeable professionals at Ubiquity are here to assist with customizing a low-cost, easy-to-manage retirement plan for your small business.

 

 

 

How to Recession-Proof Your 401(k)

Dylan Telerski / 10 Oct 2022 / 401(k) Resources

Manage your retirement plan through market volatility

Panic is palpable during a recession. Watching the daily dip in the Dow can be a painful experience for people who are accustomed to checking their stock portfolios daily.

Retirement savers may have heard that they can take out a 401(k) loan to help them through the crisis. Whether you’re actively involved with your plan or not, any market downturn presents a good opportunity to reassess and potentially recession-proof your 401(k).

Focus on what you can control

What we know from decades of watching the markets through good times and bad is that a long-term focus with regular contributions is the best strategy to grow a retirement nest egg. Resist the urge to make a hasty, knee-jerk reaction and pull your money out. Stick to your plan to reach your investment goals. It WILL get better!

Make minor changes to benefit your situation

What if you can’t rely on the long-haul, and you plan to retire within a few years? If you need short-term finances, you can sell some of your investments now, but remember that prices are low. You may end up taking a loss on the sale versus the price you originally paid for the stock. However, if retirement is still five or more years into the future, you can hold off and expect more normal annual returns when the market resumes its course again.

Take a closer look at asset allocation. Market timing rarely works, but you should at least make sure your portfolio consists of diversified mutual funds, as well as a mix of stocks and bonds. Consider target-date funds if you are older, as the fund manager will move your assets from riskier stocks to less-risky bonds and money market funds as you get closer to retirement.

Even if you’re a younger investor, you can review the assets you currently own and rebalance. If your portfolio is skewed heavily toward stocks, consider adding some bonds. If you have invested too heavily in the market, shifting to cash temporarily can be a protective measure if market volatility is wild.

Assess the risk on your individual securities. Look for mutual funds with “growth and income” or “balanced” in the name.

Most importantly, discuss your situation with your financial advisor. They know your portfolio and the market, so are better able to assess your chances of success or failure when taking your investments into your own hands.

Look for opportunity

Where some see a market wipe-out, others see opportunity. Many investors are actually increasing their contributions during the recession. Elective salary deferrals stretch further when stock prices drop.

If you can afford to, contact your plan administrator to adjust the withholding percentage. This money will come out of your paycheck seamlessly and go directly into your retirement savings. This strategy makes sense especially if you have failed to maximize your employer match; this is free money that will continue to grow for you over the long haul.

As of 2022, contribution limits have increased to $20,500, with an additional $6,500 allowed for those age 50 and older. This may be an opportunity to buy key stocks at relatively low prices to set yourself up for bigger future returns.

Recessions are common to the American economy, cycling every four years and lasting 10 months on average, but stock prices hit new highs after rebounding from each downturn. Hang in there, stay the course, and keep investing. Sticking to your plan is always safe, but don’t pass up an opportunity when it knocks. You may be able to make small, thoughtful adjustments that can optimize your returns. Contact Ubiquity to learn more about how to maximize 401(k) plans during the pandemic.

To help Maryland residents build their retirement savings, the state of Maryland is rolling out an initiative requiring all employers to offer some type of retirement plan for their workers. The deadlines for setting up a plan are rolling based on the size of the business. So what is this retirement program all about? Read on for easy answers to all your questions.

How does the Maryland $aves retirement savings program work? 

Maryland $aves is a basic, automatic-enrollment, payroll deduction Roth IRA. 

If your business opts into the state-provided IRA, after a 30-day grace period, eligible employees will automatically start saving for the future through a 5% contribution from their payroll. All participating employees will contribute a part of their salary into their IRA automatically from each paycheck. 

Is the Maryland $aves program mandatory? 

No, but if you do not sign up for any retirement plan at all, your small business will not save $300 annually on the report filing fee for those doing business in Maryland. 

Is the Maryland $aves retirement savings program a Roth IRA? 

Yes, the plan they are offering is a basic Roth IRA. This is an individual retirement account where the saver pays taxes on money going into their account, and (if the saver meets certain IRS criteria) all future withdrawals are tax-free. However, there are a few drawbacks: 

  • Limited ability to save: The total amount you can save each year into an IRA is $6,000. With a 401(k), you can save three times as much. 
  • Little tax savings. Because this money is contributed after-tax, it doesn’t lower your taxable income for the year the way a 401(k) does. 
  • Income limits: You can’t contribute to a Roth IRA at all if you make too much money. The income limit for singles in 2022 is $144,000. 

Click here to read more about 2022 contribution limits 

What will the state-run plan cost my business? 

There are no employer fees in the Maryland $aves program, but you are not allowed to make tax-deductible matching contributions as you could in a 401(k) plan. Also, any business that does not opt into this or any other retirement plan will not have their $300 waived annually for the report filing.  

What are the benefits of enrolling in the state-run plan? 

There are several advantages for companies to choose the Maryland IRA product including: 

  • No cost to the employer 
  • No fiduciary risk 
  • No investment management responsibilities
  • $300 filing report annual waiver

What are the potential drawbacks of enrolling in Illinois’s state-provided option? 

The access to workplace retirement savings plans offered by Maryland $aves is a big step forward in solving the looming retirement crisis. However, there are significant drawbacks when compared to alternative eligible 401(k) plans from a private provider like Ubiquity Retirement + Savings:

  • The contribution limit for a 401(k) is more than three times higher than that of an IRA 

Higher contribution rates allow savers to take advantage of the power of compound interest, meaning the more money that is saved, the more it can grow over time. 

  • Missing out on significant tax benefits 

Did you know small businesses that sponsor retirement plans for their employees are rewarded by the government? Thanks to the SECURE Act of 2019, small businesses can qualify for up to $16,500 in tax credits over a three-year period by starting a qualified retirement plan, such as a 401(k) plan, with auto-enrollment. Employers choosing the state provided option are not eligible for these benefits. 

  • Employees will be charged asset-based fees 

Currently, Maryland $aves charges an asset-based fee, so your employees are increasingly penalized based on how much they save. This plan has no option to select a flat-fee program, which would provide greater transparency and ultimately lower costs as savings accumulate. 

Is the Maryland $aves IRA best for my business? 

At Ubiquity Retirement + Savings, we’ve been helping small businesses and their employees grow their nest eggs for over two decades with affordable, customized 401(k) solutions. While we believe the state’s program is an important step toward ending the looming retirement crisis in Illinois, a 401(k) might be better alternative for your small business and your employees’ futures.  

Can I opt out of Maryland $aves? 

Yes. Businesses can offer a qualified retirement plan from a private provider, which could allow for more savings while providing tax incentives and greater customization. 

Let’s see how the state mandate IRA stacks up against Ubiquity’s most popular small business savings plan: 

Maryland $aves IRA

Ubiquity 401(k)

Maximum employee annual contribution amount

$6,000

$20,500¹

Additional annual employer contribution limit

Not offered

Yes, up to an additional $40,500¹

Flat fees that don’t increase with your account balance

No, asset-based fees

Yes, flat fees

Tax credit that can total up to $5,500 per year – or $16,500 for the first three years of the new 401(k) plan2

No

Yes

Flexible auto-enrollment and vesting schedules

No

Yes

Investment guidance based on individual risk tolerance

No

Yes

Employee enrollment meetings and education

No

Yes

Auto-enrollment and escalation

Required at mandated levels

Optional and flexible

Customizable investment lineups

No

Yes

 

This limit is subject to cost-of-living increases for later years (for prior years, refer to this cost-of–living adjustment table.) 

Available to eligible employers who have less than 100 employees who received at least $5,000 in compensation in the previous year, had at least one participant who was a non-highly compensated employee, and in the last 3-years did not contribute to a benefit plan for your employees through a plan sponsored by you or a member of a controlled group that includes you.
 

Choose the better path to savings with a Ubiquity 401(k) 

If you’re looking for the maximum savings potential and tax benefit, Ubiquity provides customizable 401(k) plans that act as a Maryland $aves alternative. For over two decades we have pioneered flat-fee retirement plans, designed for small businesses, all delivered online to you and your employees. That means no hidden fees or AUM charges in the fine print. We have helped hundreds of thousands of employees save for their future. 

  

The content of this blog is for informational purposes only. It should not be used as a substitute for specific tax, legal and/or financial advice that considers all relevant facts and circumstances. Be sure to consult a qualified financial adviser or tax professional for official guidance.    

 

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)

Or schedule a free consultation with a retirement specialist.

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)

Or schedule a free consultation with a retirement specialist.

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)

Or schedule a free consultation with a retirement specialist.

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.

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© 2023 Ubiquity Retirement + Savings
Privacy Policy
Do not sell my info
44 Montgomery Street, Suite 3060
San Francisco, CA 94104
Support: 855.401.4357

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