Ubiquity

Author: Dylan Telerski

Dylan is a marketing specialist at Ubiquity Retirement and Savings. A passionate champion for small business, she can be found demystifying the financial industry, advocating for the underdog, and making playlists you did not ask for.

A Small Business Owner’s Guide to CalSavers

Answering your top questions about California’s retirement savings program vs. alternative plans

In an effort to help Californians save for a financially secure future, the state of California is rolling out an initiative requiring all employers with five or more employees offer some type of retirement plan for their workers.

CalSavers—the state-sponsored plan—offers a basic Roth IRA to help employees building their retirement savings. But with low contribution limits, limited investments, and limited tax advantages, is it the best solution for empowering your team’s financial future?

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 California, a 401(k) might be better alternative for your small business and your employees’ futures.

Why is the state of California offering a retirement plan?

55 million American workers—more than 40% of full-time private-sector employees—don’t have access to a workplace retirement savings plan.

Why is this such problem?

As very few employers offer pensions and Social Security is drying up —with funds expected to be depleted as soon as 2035, it’s more responsibility is for saving falls more on the individual than ever before.

Since 2012, at least 45 states have implemented or considered establishing state-facilitated retirement savings programs–with the states of Oregon, Illinois, and our home state of California leading the charge.

In July 2019, California began rolling out CalSavers, the state-sponsored IRA program for the 7.4 million private-sector workers in the state who do not have access to an employer-sponsored retirement savings plan. As of April 30, 2021,  more than 10,000 employers were registered allowing nearly 140,000 individuals to save for their future.

We are rapidly approaching the next CalSavers deadline on June 30, 2021–employers in California with more than 50 employees will be required to enroll in the state-run Roth IRA or offer a private option.

How does CalSavers work?

CalSavers is an automatic-enrollment, payroll deduction Roth IRA. We know this sounds like a lot of financial jargon–so let’s breakdown what that means.

Automatic Enrollment

This means, if your business opts into the state provided IRA, after a 30-day grace period, eligible employees will be automatically start saving for the future through a 5% contribution from their payroll.

How does this work in practice?

Added employees will a notification from CalSavers and will have 30 days to decide to customize their account, opt out of the program, or be automatically enrolled with the standard savings choices.

Payroll Deduction

This means participating employees contribute a portion of their salary into their IRA automatically from each paycheck.

Roth IRA

A Roth IRA is an individual retirement account where the saver pays taxes on money going into your account, and (if you meet certain IRS criteria) all future withdrawals are tax-free.

Roth IRAs have a couple important rules and restrictions to keep in mind.

  • You can’t contribute to a Roth IRA if you make too much money. The income limit for singles in 2021 is $140,000.
  • The amount you can contribute each year changes, based on inflation. In 2021, the contribution limit is $6,000 a year unless you are age 50 or older—in which case, you can deposit up to $7,000.

Click here to read more about 2021 contribution limits

How much does CalSavers cost my business?

There are no employer fees in the CalSavers program–nor are you allowed to make tax deductible matching contributions, as you could in a 401(k) plan.

Your employees, on the other hand, will pay annual asset-based administration fee of 0.825% to 0.95%, depending on their investment choices. These fees will be pulled directly from their assets in their account.

What happens if an employer does not register for a qualified plan by the deadline?

If your business does not register for CalSavers, or an alternative qualified private retirement plan, you may be charged a a $250 penalty per employee starting 90 days after the deadline. The fine increases to $500 per employee 180 days after the deadline.

What are the benefits of enrolling in the CalSavers?

There are several advantages for companies to choose the California’s IRA product including:

  • No cost to the employer
  • No fiduciary risk
  • No investment management responsibilities.

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

The access to workplace retirement savings plans offered by Calsavers 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.

  • CalSavers charges your employees asset-based fees.

Currently CalSavers does not offer the choice to select a flat-fee program, which provides more transparency and ultimately lower costs as savings accumulate. By charging an asset-based fee, your employees are increasingly penalized based on how much they save.

What are the alternatives to the CalSavers program?

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 vehicle.

CalSavers IRA

Ubiquity 401(k)

Maximum employee annual contribution amount

$6,000

$19,500¹

Additional annual employer contribution limit

Not offered

Yes, up to an additional $38,500¹

Flat fees that don’t increase with your account balance

No, asset-based fees

Yes, flat fees

$500 credit to offset setup costs2

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

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

  2. 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

If you’re looking for the maximum savings potential and tax benefit, Ubiquity provides customizable 401(k) plans that act as a CalSavers 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 towards 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.   

If you’re a high earner in 2021, you’ll likely want to maximize the amount of money set aside for retirement. 401(k) plans are tremendous vehicles for producing wealth over time, though there are maximum limits established by the Internal Revenue Service to ensure the wealthiest Americans do not use their retirement plans to evade their tax obligations and to ensure employers are not setting up their plans simply to benefit the top corporate elite. The maximum 401(k) contribution changes from year to year. Get the latest numbers here!

2021 Maximum Contribution Limits for High Earners

There are general maximum 401(k) contribution limits that apply to both high and low earners:

  • Annual Employee Contribution (Under 50): $19,500
  • Annual Employee Contribution (50+): $26,000
  • Employer/Employee Maximum (Under 50): The lesser of 25% of the plans’ total eligible salary OR $58,000
  • Employer/Employee Maximum (50+): The lesser of 25% of the plans’ total eligible salary OR $64,500
  • Maximum Compensation for Employee: $290,000

The $290,000 maximum = 25% of a $232,000 salary + the maximum employer contribution of $58,000.

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

The Employee Retirement Income Security Act of 1974 (ERISA) is a federal law that protects individuals by ensuring equal opportunity access to company-sponsored retirement plans. To remain compliant and pass annual nondiscrimination tests, so-called “Highly Compensated Employees” generally cannot contribute more than 2% above their salaries than non-Highly Compensated Employees. So, if the non-HCE group contributes 5% of their combined salary to the company retirement plan, the HCEs cannot contribute more than 7% of their combined salary.

What’s Changed Since 2020?

While the $19,500 individual limit and $6,500 catchup contribution remain the same, changes include:

  • The maximum employer/employee contribution rate increased by $1,000 from 2020 to 2021.
  • The maximum income threshold of $290,000 increased by $5,000 from 2020 to 2021.

There have been no changes to the IRS definition of a “highly compensated” or “key” employee.

Are You a High Earner in 2021?

The IRS defines a Highly Compensated Employee as someone who meets at least one of the following:

  • Owns more than 5% of the business sponsoring the plan at any point within the last year, or has a spouse, child, and grandparents working for the company who collectively own 5+% of the business.
  • Made more than $130,000 in compensation during 2020 (Highly Compensated Employee). Compensation includes paycheck income, overtime, bonuses, commissions, and 401(k) salary deferrals.
  • Ranks among the Top 20% of salaries paid out by the company.*

*This only applies if the Top Paid group is elected in the plan document, please see consult your specific plan’s details.

Example of How a Maximum 401(k) Contribution Limit Applies to a High Earner

Here’s how a 401(k) maximum limit might play out in the real world:

  • Age: Under 50
  • Your annual salary: $400,000
  • Employer’s Plan: 5% match
  • Individual Contribution: $19,500
  • Employer Match: $14,500 (5% of $290,000 maximum)

So, rather than receiving 5% of your salary – which would be $20,000 – the match is limited to the upper threshold of $290,000 set by the IRS in 2021. This amount may increase next year, or the year after, based on cost of living adjustments.

 

Are There Additional Ways to Save for Retirement?

In addition to funding your 401(k) to the max, you can also contribute up to $3,600 into an individual Health Savings Account (HSA) or $7,200 for a family HSA, plus $1,000 extra if you’re over 55.

High earners may also invest as much as they’d like in stocks, bonds, mutual funds, exchange-traded funds, and real estate investment trusts – though they will have to pay taxes on the money invested, as well as capital gains taxes on the earnings.

Contact Ubiquity Retirement + Savings to find out which of our affordable, hassle-free small businesses 401(k)s are right for you and your employees. You can count on a low, transparent monthly fee that stays the same, regardless of your plan balance or participation numbers.

Whether you’re a small business owner or employee, seeing how much other companies match on their 401(k)s can give you a valuable measure of how generous your own plan is, and help you to adjust your own contributions.

Given the economic uncertainties resulting from the COVID-19 pandemic, many employees may be wondering if company matches will be reduced in 2021, and if so, how this will affect their savings goals for the year.

The good news is that though an estimated 11.5% of small companies suspended or reduced their employer match during the COVID-19 crisis of 2020, most of these employers said they plan to reinstate the matching contributions in 2021. Overall, about 51% of employers who offer a 401(k) also provide matching contributions.

If your employer is increasing their match in 2021, it could be a great opportunity to take advantage of this free money and set more ambitious savings goals. If your employer decreased their match in 2020 and will not be restoring their contributions to previous levels in 2021, you may want to consider increasing your own contributions to make up for the shortfall.

No matter what strategy you choose, investing in a 401(k) plan is one of the best ways to ensure a comfortable retirement. Small business retirement plans that offer employer-matched funds provide a generous incentive to encourage employees to save as much as they can.

Partial 401(k) Matches in 2021

Some employers choose a partial match plan, which means they put in a portion of the amount you put in, based on a set formula, up to a certain amount. The typical partial 401(k) match is 50 cents on the dollar, up to 6% of an employee’s salary. So, for instance, an employee earning $100,000 a year might contribute up to $6,000 and receive $3,000 from the employer in matching funds.

Full 401(k) Matches in 2021

Employers can also choose a plan with a “dollar-for-dollar” match, with the most common being dollar-for-dollar, up to a maximum 5% of an employee’s salary. So, using the same example, the employee earning $100,000 might put in $5,000 as 5% of his salary. The employer would then contribute another $5,000. If the employee put in $2,000, the employer would contribute $2,000. If the employee put in $6,000, the employer would contribute $5,000, as per the policy limit.

Safe Harbor Matching Formulas in 2021

Another type of 401(k) plan, popular particularly among small businesses with a handful of highly compensated employees, is the Safe Harbor plan – which exempts them from annual ADP and ACP nondiscrimination testing, in exchange for agreeing to make generous and fully vested 401(k) contributions to all eligible employees.

The most common formulas for 401(k) matching contributions are:

  • Basic Match: 100% match on the first 3% put in, plus 50% on the next 3-5% contributed by employees.
  • Enhanced Match: 100% match on the first 4-6% put in.
  • Nonelective Contribution: 3% (or more) of employee compensation, regardless of employee deferrals.

401(k) Limits in 2021

Since 401(k)s are tax-advantaged savings plans, the Internal Revenue Service places an upper limit on what may be contributed by employers and employees each year. The maximum Traditional and Safe Harbor 401(k) limits in 2021 are:

  • $19,500 in employee contributions.
  • $6,500 in additional employee catchup contributions for those over 50.
  • $38,500 in employer funds OR $58,000 (plus $6500 catchup if applicable) in total employer/employee funds.

SIMPLE 401(k) Limits

SIMPLE 401(k) limits are $13,500 for employee contributions. Those over 50 could contribute another $3,000. Employer 401(k) contributions are subject to an employee compensation cap, which is $290,000 for 2021.

Empower your employees with the gift of retirement savings

Ubiquity is a leading provider of small business 401(k) plans. We are happy to help you start a new plan, change an existing plan to a different type, or arrange employer matching contributions. When you choose us as your plan administrator, we communicate with employee plan members to ensure they know how to reach contribution limits and maximize their retirement savings. Contact us to set up your affordable and easy 401(k) plan today.

As the economy continues an uneven recovery from the pandemic-driven downturn, retirement savers may be anxious about meeting their savings targets in 2021. Thankfully, small business owners and their employees can still take advantage of substantial savings with a 401(k) plan. Even in times of economic uncertainty, it’s still a good idea to contribute enough to your 401k to receive matching contributions from your employer.

Here are some tips for how to maximize your retirement savings in 2021 with a 401(k):

Save the Maximum Allowed by the IRS

The IRS 401(k) limits for 2021 allow employees in Traditional or Safe Harbor 401(k) plans to save up to a maximum limit of $19,500.  Companies with employer contributions are allowed to bring the total contribution up to $58,000.

Switch from SIMPLE to a Traditional or Safe Harbor Plan

Small business owners with less than 100 employees are drawn to SIMPLE 401(k) plans due to their easy administration and exemption from annual nondiscrimination testing. However, one may consider switching to a similar Safe Harbor plan, which offers the same test exemption, but with higher limits.

Make Catchup Contributions

If you are over 50 years of age, you may put away an additional $6,500 in 2021 401(k) catchup contributions. This allowance is on top of the $19,500 individual or $58,000 combined maximums.

Calculate How Much You’ll Need

It’s important to know where you are and where you’re headed. Try Ubiquity’s Retirement Calculator to learn how much you should be saving toward your future today. It may also be worth reaching out to your plan administrator to discuss your goals and anticipated retirement lifestyle; a Morningstar report found that plan participants who received expert guidance saved 40 percent more than those who received no help at all.

Make Sure You’re Saving Enough to Get the Employer Match

Sixty percent of workers had access to a 401(k) plan in 2020, and 72 percent of those employees participated. Many workers were also passing on the company’s matching funds, which is essentially passing up free money. Keep in mind, contributions are typically made pre-tax, which also helps you save more this year by reducing your taxable income. If you contributed 5% or $2,500 a year on a $50,000 salary to get the employer match, and your employer put in another $2,000 in matching funds, the amount invested for that one year would be worth $26,200 in 30 years, assuming a 6% return. If you contributed as much over 10 years, you’d have $202,300 after 30 years – with $89,900 from the employer!

Start by Making Small Changes

Financial advisors recommend saving 10-15% of your salary for retirement. Only 13% of savers are able to max out their 401ks to the $19,500 limit. Time and consistency can build wealth just as well. Start by contributing 1-5% more each pay period. It is also recommended that a rebalance of your 401(k) on a quarterly–or at least annual basis may ensure your investments are earning greater returns year-over-year.

Contact Ubiquity to learn more about setting up a small business 401(k), starting a Solo 401(k), or maximizing your company’s plan up to the 2021 retirement plan contribution limits. Call today to see how simple it can be to start saving for retirement with an affordable and easy 401(k) plan.

The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 was the first major update to retirement plans in more than a decade.

Certain provisions already debuted, but one of the most significant changes — expansion of eligibility to participate in 401(k) plans – went into effect on January 1, 2021. Wondering what these changes are and what they mean for your small business this year? As a leading small business 401(k) administrator, Ubiquity is here to clarify matters.

Who Is Eligible to Participate in 401(k) Plans, Under the SECURE Act?

The 401(k) retirement savings vehicle is no longer just for long-term, full-time employees working more than 1,000 hours. Under Section 112 of the SECURE Act, eligibility expands to workers who:

  • Are at least 21 years old by the last day of the 401(k) plan year
    and
  • Work part-time for at least 500 hours per year, over the past three consecutive years.

When calculating whether or not an employee has worked “at least 500 hours,” plan sponsors are not required to count before January 1, 2021. So, while you have to start tallying up the hours your part-time workers are putting in starting this year, you may not have to formally enroll these workers into your 401(k) until the 2024 plan year.

The SECURE Act Eligibility Update’s Impact on Nondiscrimination and Top-Heavy Testing

The SECURE Act change will add a layer of administrative complexity, as plan sponsors develop new systems for tracking and reviewing hours for part-time employees over the one to three-year tracking periods.

Sponsors will need to consider whether part-time employees will also be eligible for employer contributions and whether to set a vesting schedule. If a long-term, part-time employee becomes eligible for employer contributions, each of the years they were employed and worked 500 hours (even before January 1, 2021) must count for vesting.

For employers who are subject to nondiscrimination and top-heavy testing, adding long-term, part-time employees can skew the results. The SECURE Act allows a testing exclusion for employees working 500 hours a year, but employees working 1,000 or more hours in one year must be included. If, when you start your plan, it contains more than 100 participants, you will require an independent qualified auditors report to accompany your annual Form 5500. If you’re a growing business that has been considered a small plan in the previous year, you will not be audited until you hit 120 participants.

If you are worried about your ability to pass these annual tests, you may want to consider contacting Ubiquity about adding a Safe Harbor provision to your plan for hassle-free administration.

Eligibility Questions to Consider

Plan sponsors may want to consider this short list of questions to ensure they are prepared for the change:

  • Is the hours of service tracking system updated as of January 1 to stay compliant?
  • Have you updated your plan administration documents to note the new eligibility criteria?
  • Do you wish to expand eligibility for matching or non-elective contributions to these employees?
  • Do you need to update new-hire and recruiting materials to ensure plan participation?

What’s Next?

The House Ways and Means Committee introduced SECURE Act 2.0, otherwise known as the Securing a Strong Retirement Act bill, on October 27, 2020. If passed, this bipartisan bill would, among other things, reduce the 12-month measurement period for long-term, part-time employees from three years to two years. Simply put, don’t plan on making the changes in 2024; prepare your business to increase plan enrollment today.

If you think now is the right time to start your 401(k) retirement savings plan, or have questions about switching providers, call Ubiquity, a leader in setting up and administering low-cost 401(k) plans for small businesses and solopreneurs.

COVID has taken its toll on 401(k) retirement plans, with about 8% of businesses (covering approximately more than 46,000 plans) having cut 401(k) contributions since the start of the pandemic.

While small businesses are more likely to have reduced matching or discretionary contributions as a cost-saving measure, the great majority of companies were able to maintain their retirement contributions in 2020.

Contribution Changes

According to the Plan Sponsor Council of America, more than 1 in 10 small business 401(k)s with fewer than 50 participants have made COVID-19 related changes to their matching contributions within the past year. Organizations with over 5,000 participants were 3x more likely to stay the course.

  • Almost 4 percent of 401(k) plans stopped paying a match to workers entirely.
  • 1.5 percent reduced their match.
  • 1 percent eliminated non-matching contributions.
  • 1.5 percent reduced non-matching contributions.

Though many small business employers have suspended or reduced their contributions this year, more than 90% are still contributing – which is in stark contrast to what happened during the 2008 financial crisis. A September survey by Willis Towers Watson found that most employers that suspended or reduced contributions this year plan to reinstate them by 2021.

Suspending the employer match greatly decreases plan participation and deferral rates, so it’s good that employers are taking advantage of government assistance like the Payroll Protection Program, rather than altering their 401(k)s.

Legislation Amending Loan Rules

Plans are not obligated to incorporate aspects of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, but more than half of small business plans are allowing participants to take advantage of relief by:

  • Permitting workers under 59.5 to withdraw funds as (taxable) income, without the 10% penalty.
  • Allowing increased 401(k) plan loan amounts (up to 100% of the balance, rather than the usual 50%).*
  • Pausing repayment of existing loans that were due through December 1, 2020.
  • Letting workers defer loan payments for up to one year, and, if taken for a COVID-19 hardship, allowed to repay gradually over three years.

Initially, there was not much of an increase in plan loans or withdrawals for small businesses early in 2020, but a quarter of small business 401(k) sponsors reported use of the loan feature as 2021 inched nearer. Nearly 40 of plans noted an increase in withdrawals.

*Ubiquity did not allow for this plan provision

Ubiquity Helps Small Businesses Weather the COVID-19 Crisis

Ubiquity is one of America’s leading administrators of 401(k) plans for small businesses, offering affordable flat-fee plans geared specifically toward small enterprises with fewer than 50 employees, independent contractors, and self-employed workers. We are here to answer questions, provide strategic advice, and help you make the most of small business retirement plans. Easy online setup and management allows you to get started saving for retirement without delay or make changes to your plan as needed.

2021 Solo 401(k) Contribution Deadline

Dylan Telerski / 22 Mar 2021 / Business

Self employed woman saving in a solo 401k in 2021

Did you know it’s not too late to set up and make contributions to a Solo 401(k) for 2020?

Previously, in the years prior to 2020, you would’ve had to get your account established by December 31, but the SECURE Act gives solopreneurs until the business tax deadline, April 15, 2021, to sign up for a Solo 401(k) and start saving for retirement. You may also request an extension to the 2020 Solo 401(k) contribution deadline to get even more time to make your contributions for the year.

What Are the Solo 401(k) Deadlines for 2021?

  • Single LLC and C Corps have until April 15, 2022, to set up and contribute to a Solo 401(k) for 2021.
    Please note: If a plan is adopted in 2022 for 2021 you cannot make pre-tax or Roth deferrals, but you can still make after-tax and employer contributions.
  • Partnership LLC and S Corps have until March 15, 2022, to set up and contribute to a Solo 401(k).
  • If you request and receive an extension, you may have until September or October 15, 2022, or until you file your taxes.

What Are the Solo 401(k) Contribution Limits for 2021?

  • As an employee, you may contribute up to 100% of your wages to your Solo 401(k), to the maximum.
  • The maximum Solo 401(k) contribution limit for employees is $19,500 in 2021.
  • If you’re over 50, you may contribute an additional $6,500.
  • As employer, you can reserve up to 25% of the business entity’s income, to the maximum.
  • The maximum limit for total employee/employer contributions is $58,000 in 2021.
  • If your spouse works for the business, the same allowances may be made on his or her behalf.

Should You Explore Solo 401(k) Plans in 2021?

Solo 401(k) plans offer many benefits over other types of retirement savings vehicles – particularly with the high limits of contributing as both “employer” and “employee.” The ability to choose between traditional and Roth plan types is another benefit, allowing you to choose to pay taxes on the amount invested now and enjoy a tax-free retirement, or skip on paying taxes now and allow your money to compound. If you experience financial hardship, you have the freedom to borrow from your Solo 401(k) if necessary – a key difference between a Solo 401(k) and a SEP IRA.

Opening a Solo 401(k) is easy. Online plan administrator Ubiquity will set you up in no time. If desired, you can rollover money from other accounts or set up automatic transfers from your checking, savings, or payroll accounts. If you’re interested in setting up a Solo 401(k), contact Ubiquity to establish a low-cost plan in minutes.

During his 2020 campaign, President Joe Biden proposed changes to 401(k) retirement plan rules that would likely benefit low and middle-income earners. In this blog, Ubiquity breaks down the potential impact of the proposed changes.

Traditional 401(k) Regulations

Traditionally, employees in 2021 could contribute up to $19,500 a year. Employers (or self-employed individuals) could save up to a combined maximum of $58,000. Savers can set aside an additional $6,500 in catch-up contributions if they’re over 50. The amount saved is deducted off income for the year, thus reducing their taxable income.

For instance, a person earning $200,000 a year putting in 10% to a 401(k) would only pay taxes on $180,000. Yet, a person earning $40,000 who contributes the same 10% would be taxed on $36,000. Lower earners would not reap as much in tax savings and are less incentivized to save. Employees who don’t save enough for retirement may work well beyond their most productive years because they have to, which decreases company performance and morale.

Biden’s 401(k) Plan

At this point, there is still much we don’t know. Biden says the plan would “equalize” the incentive system by replacing tax-deductible contributions with a flat tax credit for every dollar saved. The exact amount of the credit is yet-to-be-determined, but the Urban-Brookings Tax Policy Center estimates a 26% credit.

So, under this plan, if a person contributes $100, the IRS will issue a $26 credit. Someone earning $600,000 would get the same tax break as someone making $60,000 – a $260 tax credit for a $1,000 contribution. As a “refundable” credit, employees receive the full refund, even if it’s more than what they owe.

By and large, the plan would benefit lower and middle-income earners more, while high earners may move to Roth 401(k) accounts.

Additional proposals of Biden’s small business retirement plan include:

  • Automatic Enrollment: 

    Under Biden’s plan, almost all workers will be given the opportunity to conveniently save for retirement at work with a 401(k) savings plan.

  • Federal Backing for Multi-employer Defined Benefit Pension Plans: 

    Forthcoming proposals will seek to provide federally backed loans to underfunded multiemployer defined benefit pension plans.

  • Social Security Payroll Taxes: 

    High-income earners may be required to pay Social Security taxes on a larger proportion of their income. Now, employees and employers each pay 6.2% of wages to fund Social Security. This tax applies to earned income up to $142,800 for 2021. The new plan would increase Social Security taxes for earnings above $400,000, which would be taxed at 12.4%.

  • Financial Transaction Taxes:

    Whenever someone buys or sells a security, it would be considered a taxable event. This tax would pay for new government programs. Retirement plans tend to be the largest purchasers of securities, so the additional taxes may change how plan sponsors buy and sell.

  • Top Income Tax Rates: 

    The Biden plan proposes to increase the individual income tax rate on incomes above $400,000 from 37 percent to 39.6 percent.

Start Your Small Business 401(k) with Ubiquity

Looking for the best 401(k) for your small business? Ubiquity is a leading provider of 401(k) retirement plans for small businesses, whether you’re looking for a plan that covers one or 100. Our platform provides easy online setup in minutes and management that is accessible 24/7. Ubiquity customer service extends to both employers and employees alike. We are happy to help you navigate legislative changes and advise you on the best moves for your situation, at the industry’s most affordable flat-fee rate. Small business retirement planning can be a challenge, especially when the laws are always changing. Ubiquity is here to help. New plans are eligible for up to $16,500 in tax credits over the next three years, so contact us to learn more.

Americans have expressed increased interest in Environmental, Social, and Corporate Governance (ESG) funds over the last decade.

U.S. investors have sunk $17 trillion into assets managed by companies that promote diversity and clean energy. About one-third of all professionally managed assets fit ESG investment rules. Americans invested $21 billion in ESG mutual funds in 2019 – four times the prior record. Despite the economic turmoil, 2020 ESG funds are more than double the records set in 2019. While ESG funds have grown in the last few years, workplace retirement plans have generally not been robust in exploring green investment options.

401(k) Plans and ESG Funds

Workplace-sponsored retirement plans represent a huge pot of wealth. Almost a third of all U.S. retirement assets are held in 401(k) plans. Yet, only 3% of 401(k) plans offer employees an ESG fund investment option. As a result, only a tenth of 1% of 401(k) assets are held in socially responsible funds.

Several roadblocks have prevented these investors from scooping up ESGs:

  • Retirement investment trends

    Target-date funds dominate the workplace retirement plan sphere. The emphasis placed on all-in-one funds that shift from stocks to bonds as investors near retirement are a “safe” default for all employees who are auto-enrolled. One in every $5 invested in 401(k) plans are tied up in such funds – up from one in $10 a decade ago.

  • Possible lawsuits

    Employers are afraid of going out on a limb with investments that could have higher costs or underperform. Companies that pledge adherence to ESG principles will need to live up to their disclosures or find themselves on the receiving end of lawsuits. Even though all but one ESG index fund had higher net returns this year, these lawsuits could potentially jeopardize shareholder profitability, making ESG a riskier type of investment.

  • Trump administration rules

    The Labor Department changes guidance and regulation of ESG funds with every new administration. The Trump administration issued a rule requiring employers to evaluate investments exclusively based on risk and return, rather than taking social responsibility or environmental concerns into consideration. Further, employers were explicitly prohibited from auto-enrolling workers into an ESG fund.

Are Changes Coming in 2021?

2021 has already seen significant movement toward alleviating roadblocks for 401(k) investing based on ESG factors. In March 2021, The Biden administration announced that it would not enforce the 2020 Trump administration rule that made it harder to offer ESGs in workplace retirement plans.

Start Your Small Business 401(k) Plan in 2021 With Green Investment Options

For over two decades, Ubiquity Retirement + Savings has pioneered retirement savings plans designed exclusively for small and micro businesses. Since day one, our innovative solutions and low-cost, flat fee pricing make it easier than ever for small businesses to save for their future.

Our customizable 401(k) offerings include an optional turnkey ESG investment lineup, allowing small business owners to empower employees with the opportunity to save for the future while applying their savings toward the causes they care about most.

Just like personal values, investment strategies are not one-size-fits all. Ubiquity’s sustainable investment lineup includes low-cost mutual funds and exchange-traded funds (ETFs) from Vanguard, giving your team a broad range of options based on risk and personal preference.

Offer a 401(k) plan for your team with a fully diversified investment lineup that offers options for green investors.

Learn more about socially responsible investing with Ubiquity

The individual 401(k) limit for 2021 is unchanged at $19,500. If you’re over 50, you can contribute a total of $26,000. The total combined employer/employee contribution is capped at $58,000.

Each year, the IRS announces whether it will raise the maximum allowable 401(k) contributions limit. Some years, the limit increases $500 or $1,000; other years, the limit stays the same. Attaining the maximum contribution shields 401(k) plan participants from having to pay federal taxes on the amount contributed, while building the best possible nest egg for retirement.

Has the 401(k) limit changed in 2021?

The main individual 401(k) contribution limit remained the same, but the combined employer/employee max increased $1,000. If you’re self-employed, you can save $58K.

Why does the 401(k) limit change?

Sometimes the IRS adjusts the maximum limit based on “cost of living increases.” From 2018 to 2019, they increased the individual limit $500 from $18,500 to $19,000, and the total employer/employee contributions from $55,000 to $56,000.

What are catch-up contributions?

Those over 50 are getting closer to retirement. Depending on how well you’ve saved and how your cost of living has fared over the years, you may wish to increase contributions to allow for a more comfortable retirement.

What is the combined employer/employee 401(k) limit in 2021?

Most employer plans match some or all employee contributions. The employer match represents free money on top of the $19,500 individual limit that employees can earn just by participating in the plan. The combined employer and employee contribution limit is $58,000 in 2021.

This figure also matters if you are a business owner, freelancer, or solopreneur with a Solo 401k, as you can contribute as both “employer” and “employee” to the 2021 maximum of $58,000. If you’re over 50, you can save $64,500. A spouse may also participate in this plan for a maximum household savings of $116,000 (if you’re under 50) or $129,000 (if you’re over 50).

Adding a cash balance plan can help you maximize tax and retirement savings further, possibly doubling or tripling the amount set aside for your future.

What can you contribute to a Solo 401(k) plan in 2021?

Freelancers, solopreneurs, and the self-employed can contribute to a Solo 401(k) plan as both employer and employee. The total contribution amount allowed in 2020 is $57,000, though individuals over 50 can contribute an additional $6,500. Those who qualify to make catch-up contributions can put up to $63,500 into a Solo 401(k) for 2020.

If you have already reached your maximum contribution limit, adding a cash balance plan can double or even triple your tax savings.

What is the SIMPLE plan contribution limit in 2021?

Companies with fewer than 100 employees are eligible for a SIMPLE retirement savings plan. This limit remains the same at 100% of compensation or $13,500 in 2021. Catchup contributions are allowed for employees over 50.

For SIMPLE plans, the elective deferral limit is 100% of compensation or $13,500 in 2020 and 2021. If the employee is age 50 or older, catch-up contributions may also be allowed.

What can you contribute to a 403b or 457 plan in 2021?

Contribution limits for 403b nonprofit and 457 government plans have stayed the same $19,500 in 2021.

How much can you contribute to IRAs in 2021?

Many retirement savers favor the 401(k) because it allows a higher contribution limit than IRAs. Contribution limits for Traditional and Roth IRAs remained unchanged at $6,000 for 2021. This marks the third consecutive year of no change. Prior to 2019, the $5,500 IRA contribution allowance remained consistent for six years. Those over 50 can put in an extra $1,000 to catchup. IRA eligibility can be limited by income range, marital status, and workplace plan availability.

Should you hit the maximum contribution limit?

Many Americans like to take advantage of 401(k) options because they reduce the taxable income for the year. So, if you are earning $210,000/year and put in the maximum $19,500, you will only be taxed on $190,500 worth of income, which takes you from the 35% to the 32% tax bracket. Instead of owing the IRS $73,500 in taxes, you will only pay $60,800. Any money contributed to the plan compounds, with all gains tax-deferred. You only pay tax once you start withdrawing the funds in retirement.

Not everyone can afford to save $19,500 each year, but financial advisers recommend setting aside 15 percent of your income for retirement – or, at the very least, saving enough to meet the maximum employer match. Plans vary, but employers often match 50% of your contributions up to 6% of your salary or 100% of your contributions up to 3% of your salary.

Contact Ubiquity to set up a simple, low-cost 401(k) for your small business and start saving today. We offer our clients ample resources and assistance with their plans, and our experts are ready to answer your questions about your 2021 retirement contribution limits, as well as the 401(k) contribution limit deadlines for 2020. Call today and discover for yourself what sets Ubiquity apart from the rest!

The pandemic has led to serious hardship for many Americans, including furlough, job loss, illness, and lost business income.

When facing unexpected financial challenges such as these, most advisors recommend cutting expenses, taking money out of emergency savings, tapping your brokerage account, or putting expenses on a 0% interest credit card rather than raiding your retirement nest egg. However, borrowing from your 401(k) may suddenly seem like a risk worth taking if these other options are not available to you.

December 30th, 2020, was the last opportunity to take advantage of eased CARES Act hardship withdrawal rules, but you may qualify for conventional relief in 2021. If you already took a withdrawal in 2020, you’ll need to know the payback rules to ensure you don’t rack up additional penalties.

Can You Take a 401(k) Hardship Withdrawal in 2021?

The IRS defines eligible 401(k) hardships as “immediate and heavy financial needs.” These needs generally include:

  • Medical care
  • Tuition
  • Emergency home repairs
  • Funeral costs
  • Eviction prevention

The purchase of a boat, investment property, or television would not be considered a heavy financial need. However, in 2020, the CARES Act created a provision that allows for a hardship withdrawal for people whose health or finances have been impacted by COVID-19.

Not all plans permit hardship withdrawals, so you will need to check with your 401(k) provider or sponsor to see if this opportunity exists for your particular plan. If it is permitted, you will have to demonstrate that you lack available funds to cover your expenses.

401(k) Hardship Withdrawal Rules 2021

If your plan allows for early distribution, the 401(k) hardship withdrawal rules for 2021 are as follows:

  • You can only withdraw what you need. If you’re seeking money to fix your house after a flood and receive an estimate for $10,000, that is how much you’ll be approved to borrow. You make take out additional funds to cover related costs like tax or replacement furnishings. The CARES Act set a COVID-19 withdrawal limit of 100% of the vested balance, to a maximum of $100,000. (Under normal circumstances, hardship withdrawals are limited to 50% of your balance or $50,000.) This maximum includes all amounts withdrawn from tax-advantaged savings accounts, so you can’t raid IRAs, 403bs, and multiple 401(k)s.
  • What you borrow may be subject to tax and penalties. Hardship withdrawals are typically subject to income tax and a 10% early withdrawal penalty (for those under age 59.5). The 10% penalty is waived for COVID-related hardship withdrawals, and you may spread out the tax payments on the amount borrowed over the course of three years.

Who Qualifies for COVID-related 401(k) Hardships in 2021?

The IRS allows withdrawals for COVID-related 401(k) hardships if:

  • You, your spouse, or a dependent are formally diagnosed by a CDC-approved test.
  • Your household suffers a financial setback from quarantine, furlough, a layoff, or reduced hours.
  • Lack of child care due to COVID-19 causes adverse financial consequences.
  • The business you own or operate had to reduce hours, limit capacity, or close because of the virus.

Is There a Deadline for COVID-19 Withdrawals?

The deadline for a 2020 tax year withdrawal was December 30th, 2020. The IRS is continually updating their rules along with this fluid situation, so it is possible they will formally announce some type of relief applicable to the 2021 tax year as the pandemic persists.

Is There an Extended Deadline for Repaying Hardship Distributions?

If you took a hardship loan prior to the 2020 COVID-19 pandemic with repayment due between March 27 and December 31, 2020, the CARES Act allows you to delay this repayment by up to one year.

If you took a CARES Act distribution, you may repay all or part of the amount of a coronavirus-related distribution to an eligible retirement plan, within three years after the date that the distribution was received.

Managing the Tax Hit of a 401(k) Hardship Withdrawal

If you took money out in 2020, you are allowed the opportunity to repay the money back into your account over a three-year period to avoid paying income tax on the distribution. So, for instance, if you borrowed $9,000, you could repay $3,000 in 2020, 2021, and 2022. There is no rule stipulating you must space your repayments out evenly. If you’re still hurting at the end of 2020 and even through 2021, you may elect to repay the full $9,000 in late 2022.

If you cannot repay the amount borrowed from your 401(k) over the next three years, that money will be taxed as income – and you will be subject to the interest and penalties that have accrued since you took the money out. The lowest tax bracket is 10%, so that means you’d owe at least $5,000 in taxes if you took out $50,000. Typically, plan participants only have 60 days to redeposit early withdrawals, so the CARES Act’s three-year window is exceedingly generous.

Were Hardship Withdrawals a Popular Option During the Pandemic?

According to data collected by Vanguard:

  • About 5.3% of 401(k) plan participants withdrew CARES Act distributions through November 2020.
  • The majority of retirement account holders stayed the course with mutual funds, stocks, and bonds.
  • The median age of someone taking a CARES Act withdrawal was 43.
  • The median income was about $62,000.
  • The median amount withdrawn was $12,800.

How to Get Your 401(k) Back on Track After A Hardship Withdrawal

The biggest downside of taking an early withdrawal is that you lose potential growth on your investments and the momentum of compounding interest. If you’re between the ages of 30-50, simply boosting your retirement savings by 1% per paycheck could be enough to rebound from the 401(k) withdrawal. Workers between the ages of 50-70 may need to save more aggressively, depending on how much they’ve accrued, how much they’ve recently borrowed, and how soon they wish to retire.

How to Learn More About 401(k)s, Hardship Withdrawals, and IRS Rules for 2021

Ubiquity is a top provider of Solo 401(k) and small business 401(k) plans. If you have any questions about opening a new retirement account or taking full advantage of an existing 401(k), contact us for expert advice.

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

© 2021 Ubiquity Retirement + Savings
Privacy Policy
44 Montgomery Street, Suite 3060
San Francisco, CA 94104
Support: 855.401.4357

Facebook Twitter LinkedIn YouTube

© 2021 Ubiquity Retirement + Savings
Privacy Policy
44 Montgomery Street, Suite 3060
San Francisco, CA 94104
Support: 855.401.4357

Credit Card Logos