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Author: Siân Killingsworth

Safe Harbor 401(k)s are a popular choice for small business owners who are looking to reward employees with higher retirement contributions, while also maximizing their own retirement funds. With mandatory employer contributions, Safe Harbor 401(k) plans exempt employers from the hassle of annual IRS auditing and most nondiscrimination testing. Below are our tips on how to get the most out of Safe Harbor retirement plans in 2022.

2022 Safe Harbor 401(k) Quick Facts

  • Employees can contribute up to $20,500 of their annual salary, which reduces their taxable income.
  • The maximum combined employer/employee contribution limit for 2022 is $61,000.
  • Employees age 50 and older can put in an extra $6,500 in catch-up contributions on top of the maximum limits.
  • Taxes are due when employees take the money out at retirement as early as 55 years of age.
  • Employers must contribute at least 3% of each employee’s salary or match up to 4% of contributions.
  • All employer contributions are immediately 100% vested.
  • Annual IRS testing is not required.
  • Employers can claim a $500 tax credit for plan startup costs for the first three years of a new 401(k).

How to Save the Most for Your Retirement As a Small Business Owner

There are several reasons Safe Harbor plans are excellent small business retirement plans, allowing company owners to save more for retirement:

  • No annual nondiscrimination testing: Administrative costs include statement mailing, completing IRS Form 5500, approving loans and distributions, and plan participant support. These costs can range from $750 to $3,000 a year, but tend to be on the higher side if annual nondiscrimination testing is required, too. Unlike most 401(k) administrators, Ubiquity does not charge AUM or per-person fees.
  • No top-heavy refunds: In a traditional 401(k), the average amount business owners and highly compensated employees contribute to the plan cannot exceed 2% higher than the average amount regular employees contribute.

If the 401(k) plan has low enrollment or modest participation, those with the means to fund their retirement would be unable to do so. By agreeing to contribute at least 3% to all staff members, you maximize the freedom to fund your retirement to the limit and generously reward key employees as well.

  • Lower tax burden: Contributions made to your own plan lower your personal taxable income for the year. Contributions made to your employees lower your taxable business income for the year.
  • Higher profitability: According to T. Rowe Price, companies with great 401(k) plans have 20-80% higher profits than companies with poor 401(k)s. The research suggests that well-compensated employees are more satisfied and productive. Lower turnover means lower training costs, which allows you to save more money for retirement and reinvest more into the business.

What Safe Harbor 401(k) Formulas Are Available?

With a 3% nonelective contribution, employers simply fund each employee’s plan to the tune of 3% of the employee’s annual salary up to the maximum employer/employee limit, regardless of what the employee contributes.

Other options for a Safe Harbor 401(k) employer matching formula include:

  • Basic: A 100% match on the first 3% of employee contributions and 50% match on the next 3-5%.
  • Enhanced: A 100% match on the first 4-6% of employee contributions.

As a small business employer, any of these match formulas will satisfy the Safe Harbor requirements and allow you to contribute up to $61,000 to your own retirement fund, acting as both “employee” and “employer.”

Considering the Transition to a Safe Harbor 401(k)?

Whether you’re starting a brand-new Safe Harbor or converting an existing small business 401(k) by adding an amendment, Ubiquity can help. Our small business focus and flexible plans allow us to serve our clients at a lower cost without AUM or per-enrollee fees, which means your plan can grow without penalty. Contact us for details.

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

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

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

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

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

Hi [First Name],

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

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

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

Best,

[Your Name]

  • Email 2: Expand on value & differentiate

Hey [First Name]!

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

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

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

Best,
[Your Name]

  • Email 3: Reminder

Hi [First Name],

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

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

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

Thanks,
[Your Name]

  • Email 4: Offer Personalized Support

Hi [First Name],

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

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

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

Thanks,
[Your Name]

  • Email 5: Final outreach/Meeting request

Hi [First Name], I know you’re busy.

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

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

Best regards,
[Your Name]

Finalize and Scale

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

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

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

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

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

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

Your Plan

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

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

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

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How many employees do you have?
I am a sole proprietor
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Employee Eligibility

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

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

2022 IRS Limit

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

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

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

Employee Compensation Limits

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

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

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

Vesting Schedules

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

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

Despite a climate of economic uncertainty, it’s still possible to create stability for retirement by maximizing 401(k) plan benefits, diversifying investments, maintaining the right portfolio mix, and resisting the temptation to cash out early.

For many Americans, a “golden retirement” may not feel as certain as it once was. A recent study from the Natixis Global Retirement Index found 59% of Americans accept that they will have to keep working longer, 41% say their ability to secure financial freedom is “going to take a miracle,” and 36% have given up hopes of being able to retire at all.

These days, investors are particularly worried about Social Security running out of funds, low interest rates, and soaring inflation. However, boom and bust cycles are inevitable in the economy, so investors will need a disciplined approach to temper these natural fluctuations.

Get the Full Employer 401(k) Match

Knowing the company 401(k) plan is one of the earliest steps to creating a stable retirement foundation. A company’s matching funds represent “free money” that can be added to a savings plan, tax-free, with compounding growth and interest at very little expense to the employee.

Plans vary, but a company may offer a 100% match on the first 4%, followed by a 50% match on the next 2%, for instance. Contributing at least that amount will ensure not a penny is left on the table.

Consider Working for Enjoyment

Picking up a part-time job after departing a full-time position can present an opportunity to explore hobbies and interests while postponing Social Security and retirement distributions, so the payouts are ultimately larger. This extra time also allows a portfolio the chance to recover after taking a few lumps from a downturned economy.

For instance, a 401(k) plan that dipped from $200,000 to $150,000 in value could be worth $190,000 if an investor socked the money away into a low-risk five-year CD that pays 5% returns. Meanwhile, working 20 hours a week—even if the job only paid a meager $12 per hour—would pay $12,000 per year—equivalent to a $100,000 portfolio earning a 12% annual distribution.

Stay the Course With Disciplined Withdrawals

Even before the pandemic, Boston College’s Center for Retirement Research estimated that 1.5% of assets leak out of 401(k)s and IRAs each year due to pre-retirement withdrawals for hardships after age 59.5, job cash-outs, and loans. While these avenues for emergency funds exist, they also jeopardize one’s financial future—often resulting in a 25% reduction in wealth at retirement.

After years of saving money and sacrificing, the temptation for new retirees to treat themselves with a big year-one withdrawal for a vacation or major purchase is very real. However, most experts suggest withdrawing 3-5% of account funds in the first year and determining how to adjust annual withdrawals to keep pace with inflation.

Make the Biggest 401(k) Contribution You Can Afford

There may be some years when you are not able to make the maximum contribution to your 401(k), especially in an unpredictable economy. However, contributing the maximum amount that you can afford will give you the best chance to stay on track to meet your retirement savings goals.

In 2022, the maximum 401(k) contribution amount is $20,500. To see how 401(k) contributions affect your take-home salary and to find the amount that will work best for you in your current financial situation, use our handy, free 401(k) paycheck calculator.

Are you looking into 401(k) retirement plans for your small business? Ubiquity is a top provider of low-fee, easy-to-manage small business 401(k)s. Reach out today to see how we can help you set aside more money for retirement and meet your savings goals even in financially tumultuous times.

401(k) Hardship Withdrawal Rules 2022

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

Illustration of hand receiving money from a machine.

The CARES Act of 2020 allowed up to $100,000 in early hardship withdrawal distributions at age 59.5 from 401(k) and IRA retirement savings plans without the usual 10% penalty. However, the IRS discontinued the early pandemic program in 2021, and it is no longer available in 2022. If you are currently experiencing financial hardship, options still exist, but borrowing from your retirement should be treated as a last resort.

When to Make a 401(k) Hardship Withdrawal

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

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

How Early Retirement Plan Withdrawals for Hardship Work

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

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

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

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

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

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

Will I Have to Pay a Penalty for Taking a 401(k) Hardship Withdrawal in 2022?

The 10% penalty for 401k hardship withdrawals is waived in cases of:

  • Becoming totally disabled
  • Medical debt in excess of 7.5% of adjusted gross income
  • Court order to give the money to a former partner in divorce
  • Leaving the company for any reason in the year you turn 55 (or later)
  • Leaving the company after arranging for a gradual withdrawal over the course of your life expectancy

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

Plans that allow early distribution in 2022 let you borrow only what is necessary to cover the cost of the stated expense. You can take out up to 50% of your balance or $50,000 under normal circumstances. If you took out a CARES Act loan, you could have taken up to 100% of your balance or $100,000. This maximum includes all tax-advantaged retirement savings funds like IRAs, 403(b)s, and other 401(k)s.

Alternatives to 401(k) Hardship Withdrawal in 2022

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

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

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

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

If you are age 59.5 or younger and leave your job before paying back the loan, you’ll have until Tax Day of the subsequent year to repay the entire loan. Otherwise, the full balance will be taxed and penalized as a withdrawal. On the other hand, 401(k) hardships do not need to be repaid and are not charged interest.

What Is the Rule of 55?

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

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

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

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

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

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

What is the CalSavers June 2022 Deadline?

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

deadline calendar

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

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

Who Must Register Employees for the CalSavers Program?

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

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

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

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

What Were the Previous CalSavers Retirement Plan Deadlines?

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

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

What Happens If Companies Miss the CalSavers Deadline?

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

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

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

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

How Does CalSavers Work?

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

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

Why Isn’t There a CalSavers 401(k)?

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

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

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

Since the government requires annual top heavy and nondiscrimination testing, employers may elect to make matching or non-elective contributions to employee accounts as a benefit to workers that satisfies fairness requirements.

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

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

Retirement planning is a fairly specialized space within the larger arena of personal finance, so it isn’t surprising that there is a lot of industry lingo that might be unfamiliar. Below are some essential terms defined for your convenience.

401(k) Retirement Account

  • Traditional 401(k): Business owners, including those who are self-employed, can start a 401(k) plan for themselves and their employees, if applicable. A 401(k) plan enables businesses to meet retirement planning and saving goals while taking advantage of business and personal tax benefits. With a Ubiquity 401(k) plan, retirement contributions can be either pre- or post-tax (Roth), with funds being deposited directly from an employee’s paycheck each pay period. Many companies also match a part of their employees’ contributions.
  • Solo 401(k): This plan provides all the benefits of a big 401(k) plan, including maximum tax savings for self-employed individuals with no full-time employees other than the business owner and a spouse, if applicable.
  • Roth 401(k): A hybrid between a Roth IRA and a 401(k) plan, earnings on after-tax contributions grow tax-free. However, the contribution limits in a Roth 401(k) are significantly higher than a Roth IRA — $20,500 ($27,000 if age 50 or older) in 2022, compared to $6,000 for a Roth IRA.

Company stock awards or stock options

Some companies include stock awards or options as part of the compensation package. These typically require an employee to hold the shares for a period of time before transferring or selling is permitted.

Individual Retirement Account (IRA)

  • Traditional IRA: An IRA is a retirement savings vehicle that allows you to defer taxes on the earnings and growth of your savings until you need it in retirement. If you try to dip into these funds before age 59 ½, the IRS will impose a 10% early distribution tax penalty in addition to taxing the amount of the withdrawal at your current income tax rate. A traditional IRA has a required minimum distribution (RMD) starting at age 72. If you’re curious about weighing the benefits of a 401(k) vs an IRA, click here.
  • Roth IRA: A Roth IRA is a retirement savings vehicle that allows employees to withdraw savings and distributions tax-free if certain requirements are met. Unlike a traditional IRA, contributions are not tax deductible, but the earnings on these Roth contributions still grow tax-free.
  • Simplified Employee Pension (SEP) Plan: This is an individual retirement plan set up by employers in which only the employer contributes to employee accounts. Although it is available for any size business, it is often used by self-employed people. Contribution limits are higher than in a traditional IRA plan.
  • Savings Incentive Match Plan for Employees (SIMPLE) IRA: This is a plan for small businesses that permits both employees and employers to contribute to retirement accounts. Easy for employers to set up and with no filing requirements, these plans must be the only retirement plan offered to employees.

Early Withdrawal Penalty

If you are under age 59 ½ when you withdraw from the account, the IRS may penalize you for up to 10% of the withdrawal amount when you file that year’s taxes.

Elective Deferrals

Amounts contributed to a plan by the employer at the employee’s election and, except to the extent they are designated Roth contributions, are excludable from the employee’s gross income.

Employee Contribution Limits

The total amount of money an employee may contribute to a retirement fund. In 2022, that limit for people age 49 and younger is $20,500. For those age 50 and older, the limit is $27,000.

Defined Contribution Plan

A retirement plan that’s typically tax-deferred, like a 401(k) in which employees contribute a fixed amount or a percentage of their paychecks in an account that is intended to fund their retirements. The employer will generally match a part of employee contributions as an added benefit to help keep and attract top talent. These plans place restrictions that control when and how each employee can withdraw from these accounts without penalties.

Distribution

The word the IRS and the financial industry use to talk about withdrawing money from an employer-sponsored retirement plan or any other tax-deferred retirement plan, like an IRA.

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How many employees do you have?
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Hardship Withdrawal

Taking money from your account to help cover expenses during a hardship. 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, and eviction prevention.

Matching Contributions

In a 401(k) plan, employers may contribute to an employee’s retirement account up to a certain amount as defined by a percentage or the IRS maximum.

Nondiscrimination Testing

The Internal Revenue Service requires these tests to ensure that employers are offering fair plans to all employees – not just the company owners, highly-compensated employees, and key individuals. Testing should happen annually at the end of the plan year, but proactive companies have their plan administrator conduct routine audits and conduct mid-year analysis to reduce the risk of failure.

Pension

Some employers offer pensions, which typically require the employee to work for the company for a set period of time before they qualify to receive the pension.

Plan Administrator

The plan administrator can be the employer, a company owner, a committee of key executives or board members, or, most commonly, a third-party partner. They set up and maintain the plan on a day-to-day basis. Ubiquity Retirement + Savings is a plan administrator.

Plan Sponsor

In addition to the owner of the company, the plan sponsor can also be a union, a group of representatives, or a key executive. Often, a plan sponsor is also referred to as a “fiduciary” – a person who takes legal responsibility for making decisions on behalf of plan participants. Fiduciaries agree to avoid conflicts of interest and work to keep fees reasonable. The fiduciary can also be held personally liable for plan losses caused by mismanagement.

Plan Provider

The company that creates, manages, and sells the retirement plan an employer selects. Ubiquity Retirement + Savings is a plan provider.

Profit Sharing

A feature that can be added to a 401(k) plan to help employees save for retirement while allowing for maximum flexibility on how much the plan costs. Employers can decide from year to year whether they want to make contributions to employee plans depending on how much revenue the company earned that year. Even if employees themselves do not wish to take advantage of tax-deferred savings, they can still receive the profit share contribution. Compared to 401(k) matching contribution formulas, employers find a wider range of options with profit-sharing, though there may be limitations based on IRS nondiscrimination test rules.

Required Minimum Distributions

Also called an ‘RMD’, this is the smallest amount you must withdraw from your account each year. You generally must start taking withdrawals from your IRA, SEP IRA, SIMPLE IRA, or retirement plan account when you reach age 72.

Rollover

Moving funds from one retirement account to another. This is typically performed when an employee starts a new job in order to minimize the number of open accounts the employee owns.

Safe Harbor Plan

Each year, a 401(k) plan needs to pass nondiscrimination tests (see above) designed to prevent any unfair benefits to the company’s high-earning employees. If the 401(k) fails these tests, the business owner can move to a Safe Harbor 401(k) plan, which allows the plan to bypass these tests in exchange for additional contributions from the business owner. Additionally, with a Safe Harbor 401(k) plan, business owners and any highly compensated employees can maximize their contributions instead of being limited by the amount non-highly compensated employees contribute.

Vesting

  • Standard vesting: Ownership by an employee of company funds or equity.
  • Cliff vesting: The “cliff” is the time period after which vesting, or ownership, is permitted. For example, a one-year cliff means that employees are vested after a full year of employment.
  • Graded vesting: Grants an employee ownership of employer contributions gradually over time.
  • Immediate vesting: Grants an employee 100% ownership of any employer contributions to their retirement account.

If you’re ready to talk about setting up a retirement plan for your company, contact us today for a free consultation.

SECURE Act 2022 Eligibility Updates

Siân Killingsworth / 18 Apr 2022 / Business

Capitol Building–SECURE Act 2.0 | Ubiquity

The 2019 Setting Every Community Up for Retirement Enhancement (SECURE) Act changed the rules for 401(k) eligibility, as well as for top-heavy and nondiscrimination testing. The most recent expansion of eligibility to participate in 401(k)s went into effect at the start of 2021. Further SECURE Act updates may be in the works. Read on below to learn what these new rules mean for your small business 401(k) plan.

Who is eligible to participate in 401(k) plans in 2022?

Previous to the SECURE Act, part-time employees working less than 1,000 hours in a year could be excluded from an employer’s 401(k) plan. Plan years beginning after December 31, 2020, require employers to open vesting to:

  • All long-term, part-time employees who will be at least 21 years of age by December 31, 2023
  • Have worked 500 to 999 hours each year for three consecutive years, and
  • Who are not covered under separately governed collective bargaining plans like 403(b)s or 457(b)s

Employees must be at least 18 years old in 2021 for vesting and 21 to participate. Therefore, employers are not required to permit these long-term, part-time employees to enter the plan under this rule until January 1, 2024.

Do employers have to track time to determine eligibility?

Employers may choose to allow employee elective deferrals right away so they do not have to track hours. Otherwise, employers will need to update their administrative systems and begin tracking all service hours after January 1, 2021, to determine eligibility.

Do employers have to match part-time workers’ 401(k) contributions?

Employees working less than 1,000 hours a year must be allowed to make their own 401(k) contributions if they wish. But employers can still choose to exclude part-timers from employer matching contributions, safe harbor contributions, and employer profit share contributions.

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Are part-time workers included in non-discrimination testing under the SECURE Act?

Part-time employers who have recently gained eligibility to participate in the 401(k) plan solely under the SECURE Act provision can be excluded from annual non-discrimination and top-heavy tests.

What are the deadlines for plan sponsors to amend their 401(k) plan documents?

  • All eligible part-timers must be allowed the opportunity to contribute to a 401(k) by January 1, 2024
  • The SECURE Act changes must be reflected in the 401(k) plan documents by December 31, 2022
  • Unless elective deferrals are immediately approved, employers need to track hours by January 1, 2021

What eligibility changes are included in the SECURE Act Update?

The House Ways and Means Committee introduced a SECURE Act update on October 27, 2020. If passed, the Securing a Strong Retirement Act bill (SECURE Act 2.0) would reduce the vesting period for long-term, part-time employees from three years to two years.

Starting in 2025, all eligible participants would be auto-enrolled at a minimum contribution rate of 3%. This rate will increase by 1% each year until reaching 10%, unless the employee specifically opts out. Also, eligibility for required minimum distributions would increase from 72 to 73. It’s best to start planning for changes to plan enrollment sooner than later.

Ubiquity offers easy, affordable 401(k) retirement plans for your small business. Contact us to learn how to start a new plan or if you have questions about switching from your current provider.

 

How Are Small Businesses Doing in 2022?

Siân Killingsworth / 18 Apr 2022 / Business

Illustration Payroll Integration

Small businesses in 2022 are worrying less about last year’s woes—forced closures, employee quarantines, and new health guidelines. Instead they are now concerned about inflation, supply chain issues, and labor shortages. Despite these challenges, small business filings and overall optimism remain high.

Small Businesses Are Growing

It’s not exactly smooth sailing, but small businesses are weathering the storm and cruising forward with optimism in 2022. Even amid the worst stages of economic uncertainty, over 900,000 entrepreneurs in the U.S. stepped up to form new retail small businesses in 2021. Another 77,000 manufacturing and 111,0000 wholesale applications were filed, according to the U.S. Census Bureau. All told, 5.4 million new companies formed in 2021, up from 4.3 million in 2020.

Reasons for Small Business Optimism in 2022

The  Small Business Index found that 77% of small business owners are optimistic about their future.

  • Confidence – After surviving overwhelming challenges, business owners have been surprised by their own resilience. As we shift to the new phase of living with endemic coronavirus, it seems unlikely we will go into full lockdown mode again.
  • Innovation – Innovations like curbside pickup, home delivery service, and remote working have allowed businesses to thrive amid uncertainty. These adaptations are likely here to stay. In the coming year, evolving retail media revenue opportunities will allow small businesses to compete with much bigger ones.
  • Customer Support – Americans are eager to support small, local businesses, according to the U.S. Chamber of Commerce. In December 2021, 57% of U.S. shoppers said they planned to “spend more money at small businesses over the next six months to help local employers and enjoy stellar customer service.”

Small Business Challenges in 2022

Small businesses have big growth planned, but have trouble meeting objectives when funds, supplies, and personnel are in short supply.

  • Inflation – The Clarify Capital survey found that 42% of small businesses cite inflation as their chief worry. Two-thirds say it has become “increasingly problematic” in the first half of 2022. With inflation stuck at a 40-year high, three in five small business owners say they’ve had to raise prices this year, according to the Small Business Index. Some have decreased staff or taken out loans to manage the higher cost of raw materials.
  • Supply Chain Issues – A Goldman Sachs survey found 69% of small business owners have supply chain issues that negatively impact their bottom line. Most respondents feel suppliers are favoring larger volume clients. Two in three small businesses have had to alter their supply chains over the past six months, according to the U.S. Chamber of Commerce. They expect supply chain issues to persist for at least six months.
  • Labor Shortages – People understand that they hold the upper hand in the labor market. As record jobs are created, workers are dropping out of the market to care for a loved one or retire early. Finding and retaining top talent is difficult for 87% of small businesses. Unfilled positions are hurting the bottom line for 97%, according to Goldman Sachs.

Looking to Make Your Small Business Even Better in 2022?

Ubiquity is a top provider of small business 401(k)s, offering full setup and ongoing administrative support for one low monthly fee. We never charge Assets Under Management or per-person fees, so you can scale your business and your 401(k) plan without worry. Plans are flexible, so you can pause, adjust, and adjust as needed.

Offering a 401(k) plan for your small business is a great way to lower your tax burden, pick up new tax credits, attract and retain employees, and save a comfortable cushion for your future, too. Contact us to schedule a free consultation.

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

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

What is a Highly Compensated Employee in 2022?

A Highly Compensated Employee in 2022:

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

Examples of Highly Compensated Employees in 2022

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

In a ten-person small business:

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

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

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

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

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

There was no change to the catch up compensation amount.

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

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

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

What Can Employers Do to Save More in 2022?

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

What Can Employees Do to Save More in 2022?

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

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

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

 

 

2022 401(k) Catch Up Contribution Rules

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

Self Employed business woman at desk

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

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

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

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

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

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

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

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

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

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

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Are Employer 401(k) Contributions Rising in 2022?

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

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

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

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

When Are Taxes Due on 2022 Retirement Savings?

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

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

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

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

What Types of Retirement Accounts Allow Catch-Up Contributions?

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

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

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

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

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

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

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

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

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

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

 

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© 2022 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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