Category: Business

Find easy to understand Business Information relating to 401(k) plans and from Ubiquity Retirement + Savings. Find easy to understand rules and regulations, along with tips and advice from our team of 401(k) business experts. Call Ubiquity today for a Free Consultation at 855.466.5825.

One of the benefits of a Solo 401(k) is that your spouse can also participate in the plan. If you both take taxable income from the same sole proprietorship, your spouse can make equal contributions.

A Solo 401(k) is designed for a business owner with NO employees. However, you may add a spouse to your plan as an exception to the rule. You may also employ:

  • 1099 contractors
  • Minors under 21
  • Union workers
  • Nonresident aliens, and
  • Part-time workers who put in less than 1,000 hours per year

If you plan to hire full-time W2 employees, you will need to stop making contributions and rollover your self-directed Solo 401(k) to a self-directed IRA or small business 401k within a year.

What Is the Benefit of Adding a Spouse to a Solo 401(k)?

A married couple with a Solo 401(k) can contribute a maximum of $114,000 per year for retirement as both employer and employees. If you and your spouse are over 50 years of age, total contributions can reach $127,000. Once the plan reaches $250,000 or more in assets, Form 5500-SF will need to be submitted to the IRS.

Get Your Complimentary Guide to Solo 401(k) plans


How to Open a Solo 401(k)

Starting a Solo 401(k) online with Ubiquity takes only a few minutes. To get started, you’ll need an Employer Identification Number. You can choose your own investments or work with a broker of choice to select mutual funds, index funds, ETFs, individual stocks and bonds, or real estate investments.

Ubiquity handles all the day-to-day accounting and management for a low monthly fee, while you focus on growing your retirement nest egg. You can open your account at any time, but you’ll need to file the paperwork by December 31 to make it count for this year. Any contributions made until April of next year can be used to reduce tax liability for the year.

How to Include Your Spouse in Your Solo 401(k)

If you’re a sole proprietorship, your spouse will receive a W2 as an “employee.” This solution is best if the spouse has minimal duties in the business.

You can also choose to file as a partnership, where each partner receives a K-1 (Form 1065). The partnership bypasses income taxes, passing profits and losses onto each partner. The IRS views this structure as ideal if both partners contribute materially to the business.

A Qualified Joint Venture may be possible if both spouses work and contribute materially to the business and file a joint tax return. Each spouse reports income gains, losses, deductions, and credits separately on Form 1040 Schedule C.

Spouses can also form LLCs, and C or S corporations.

If you have any additional questions about starting a new Solo 401(k) or adding a spouse to an existing Solo 401(k), don’t hesitate to contact Ubiquity.

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With the end of the year fast approaching, many small business owners, independent contractors, and real estate investors are looking for tax savings. December is not too late to open a new 401(k) account, convert to a new retirement account type, or make your contributions. Depending on your situation, you may have more time than you think to plan the ideal tax scenario for 2020.

Contact Ubiquity for assistance with setup and ongoing administration. We cater to small businesses and self-employed individuals with flat-fee plans that meet your business needs and your budget.

Reasons to open a 401(k) before the end of the year

If you’ve put off thinking about your retirement until the end of the year, here are a few reasons to act now:

Generous contribution allowances will help you save for retirement.

401(k) account offers much higher contribution limits than most IRAs – some of which max out at $6,000. SEP IRAs do not allow employee contributions, so you may not be able to save as much as you’d like. In 2020, the annual 401(k) limit is $19,500 for employees or $57,000 for employer/employee totals, plus an additional $6,000 if you’re over 50. Next year, the employee maximum will stay the same, but this amount will increase to $58,000 total and $6,500 for the catchup contribution.

You’ll start compounding interest sooner rather than later.

When you invest in a 401(k), the money you add generates interest. This interest compounds year after year, as you earn interest on your interest.

Here’s an example. Let’s assume a very modest ability to save and a not-so-fantastic economy returning just 5 percent. If you were to put in $5,000 this month and contribute just $100/month to your 401(k), in 30 years’ time, you could have $105,924 saved for retirement.

On the other hand, say you put in the maximum of $57,000 today and contribute at least that much every year for 30 years. You’d be sitting on $4.2 million or more for retirement.

You had a particularly profitable year.

Some 401(k) plans allow you to make a year-end bonus deposit directly into your account to reduce how much taxes you owe for 2020 AND boost your retirement savings without cutting deep into your regular paychecks.

You want to get on track for next year.

Opening a 401(k) now will help you attain your New Year’s resolution to save more for retirement in 2021. Establishing an account with a generous contribution level is one of the best ways to achieve a comfortable future. If you want to hit the maximum for 2021, you can save up to $1,625 per month (for an annual total of $19,500). If you’re over 50, you can put in an extra $541.66 a month ($6,500 total). If you are self-employed, you can contribute as both employee and employer to a maximum of $57,000 a year, plus the over-50 contribution.

The deadline to establish a new Solo 401(k) account is December 31, 2020.

If you are self-employed with no full-time regular employees working for you (with the exception of a spouse), then you could qualify for tremendous tax savings with a Solo 401(k) account. You will be able to contribute as both employer and employee.

This means you can deposit a maximum of $56,000 (plus $6,000 more if you are over 50 years old) for yourself – which will then reduce your taxable income for 2020. You can also add your spouse to double your household savings if your spouse is not covered by another plan.

All you have to do is sign the Solo 401(k) adoption documents by December 31, 2020, and you will have until your tax return due date (April 15, 2021) to make the contributions for 2020. It is possible to apply for extensions to have until July 15 or even October 15.

If you’ve had a very lucrative year, you can also concurrently contribute money each month to put toward your 2021 return. If not, you can always take your time and save for the upcoming year well into 2022 in the same fashion, filing for tax return extensions if necessary.

Employers can adopt a new 401(k) plan by December 31, 2020 – or wait even longer!

The SECURE Act brought good news for employers: an extended deadline for adopting a new Traditional 401(k) plan! You used to have until December 31, but now you have until the tax return deadline – including extensions. Here’s what those 401(k) contribution deadlines look like for the 2020 Tax Year:

  • 12/2/20 – Convert a Traditional 401(k) into a Safe Harbor for 2020 with 3% nonelective contribution.
  • 3/15/21 – Adopt a 2020 Traditional 401(k) plan if you are taxed as a Partnership or S-Corp.
  • 4/15/21 – Adopt a 2020 Traditional 401(k) plan if you are a Sole Proprietorship or C-Corp.
  • 9/15/21 – Adopt a 2020 Traditional 401(k) if you filed an extension as a Partnership or S-Corp.
  • 10/15/21 – Adopt a 2020 Traditional 401(k) if you filed an extension as a Sole Proprietorship or C-Corp.
  • 12/31/21 – Convert a Traditional 401(k) plan into a 4% nonelective safe harbor plan for 2020.

Employees do not have more time to make salary deferrals, but employers have more time to decide whether they want to make a year-end profit-sharing contribution. Adding a Safe Harbor amendment to your plan is a great option if you worry you might not pass nondiscrimination tests for the year. Fortunately, you have plenty of time to make this decision.

Planning for the 2021 Plan Year

Now is also a good time to plan for the 2021 tax year using the following deadlines:

  • 11/2/20 – Notify SIMPLE IRA participants that their plan will convert to a new 401(k) plan on 1/1/21.
  • 12/2/20 – Notify participants that the Traditional 401(k) will convert to a matched Safe Harbor in 2021.
  • 12/31/20 – Plan your conversion of an existing 401(k) to a match-based Safe Harbor for 2021.
  • 10/1/21 – Adopt a new Safe Harbor 401(k) plan for 2021.
  • 12/2/21 – Convert a Traditional 401(k) plan to a 3% nonelective Safe Harbor for 2021.
  • 3/15/22 – Start a new Traditional 401(k) for 2021 if you’re an S-Corp or Partnership.
  • 4/15/22 – Start a new Traditional 401(k) for 2021 if you’re a C-Corp or Sole Proprietorship.
  • 9/15/22 – Start a new Traditional 401(k) for 2021 if you’re an S-Corp or Partnership with an extension.
  • 10/15/22 – Start a new Traditional 401(k) for 2021 if you’re a C-Corp or Sole Proprietor with extension.

If you have any questions about setting up a small business 401(k), contact Ubiquity to administer the plan.

Self Employed business woman at desk

One of the benefits of the Solo 401(k) is that it’s relatively easy to administer, with nothing more than a 5500-EZ form filing due once the total account balance reaches $250,000 or gets terminated.

However, to maximize the tax-exemptions for your small business retirement account, you will also need to claim your Solo 401(k) contributions on your tax return.

Clearing Up Solo 401(k) Confusion

When thinking of your Solo 401(k), it’s helpful to think of yourself as both “employee” and “employer.” Therefore, you will be making two different tax calculations – one for your business’ net earnings and one for your business’ tax-exempt contributions.

Get Your Complimentary Guide to Solo 401(k) plans


How to Claim the Solo 401(k) Contribution for Pass-Through Businesses

If your business is a pass-through structure like a sole proprietorship, LLC, or partnership:

  • Submit both contributions to the IRS on your personal tax return, form 1040.
  • Calculate your earned income from the business using Schedule C.
  • Report the total employer and employee contribution on line 15 of Schedule 1.
  • Subtract the employer contribution from your taxable income to report adjusted income on line 8a of Schedule 1.

How to Claim the Solo 401(k) Contribution for S-Corps

If your business of one is classified as a corporation, business income and contributions are calculated as a separate entity, independent from your personal income tax return. However, S-corps receive special treatment, as business income may pass through to owners and shareholders.

You will need to file an additional tax return for your business in this case, but you enjoy freedom from any other “corporate tax” obligations.

  • Fill out your S-corp information using Form 1120-S.
  • List your Solo 401(k) employer contribution on line 23.
  • You will also need to fill out Form 5500 or 5500-SF if your account balance is over $250,000.
  • And, on a personal level, you will need to fill out the employee contribution on box 12 of your W2.

Keep in mind: your salary-reducing portion of the Solo 401(k) contribution has already been deducted from your taxable amount in box 1 of your W2.

What If You Have a Roth?

Roth contributions are after-tax, so they won’t be listed on your personal or business tax returns. While you aren’t claiming a deduction anywhere for the money put into your account, you will enjoy tax savings upon retirement as you’re taking the money out.

Have Questions About Claiming a Solo 401(k) Contribution Deduction?

As your 401(k) plan provider, we are always happy to assist our Solo 401(k) contributors at tax time. Use our convenient Solo 401(k) calculator, or contact our on-staff accountants to ensure you meet all necessary filing requirements and fully understand the unique advantages of a Solo 401(k). Contact Ubiquity to learn more.

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2020 Solo 401(k) Contribution Deadline

Dylan Telerski / 9 Nov 2020 / Business

deadline calendar

There is a new Solo 401(k) contribution deadline for 2020. Previously, you would have had until December 31, 2020, to establish your Solo 401(k) plan, which would allow you until April 15, 2021 (the Tax Filing Deadline) to make contributions. Now, you have until April 15, 2021, to get a new Solo 401(k) account opened for 2020 and make contributions.

New Solo 401(k) Setup for the Year 2020 is Due 4/15/21

Your business must adopt a new Solo 401(k) by April 15, 2021, in order to make 2020 contributions. If you haven’t adopted a Solo 401(k) yet, you should start now so your documents will be completed, and you can spread out your contributions over the next six months. After all, you can contribute 100% of your wages up to a maximum of $19,500 as an “employee” — or to a maximum of $26,000 if you’re over 50.

As “employer,” you can set aside an additional 25% of the business entity’s income (to a maximum of $57,000) as a profit-sharing contribution. If you have a spouse working for the business, the same allowances may be made on his or her behalf to maximize your household retirement savings.

Get Your Complimentary Guide to Solo 401(k) plans


Deadline Extended for Existing Solo 401(k)s

If you had a single-member LLC or C-corp Solo 401(k) in 2019, the contribution deadline was April 15, 2020. If you had an S-corp or partnership LLC, the deadline was March 15, 2020. Both of these deadlines could be extended another six months (until September or October 2020) by filing an extension request. This is a huge benefit for people who want to make 2019 contributions but won’t have the funds available until later in the year.

What You Should Be Doing Now to Prepare

Even though employer and employee contributions can be extended until the company tax return deadline, you will still need to file a W2 for your “employee” wages by January 31, 2021. This W2 details your wages and deductions for employee retirement plan contributions in box 12. At the very least, you should determine the amount you plan to contribute by this deadline.

Solo 401(k) Contributions Example

Here’s an example of how Solo 401(k) contributions might work out:

Josephine is 33 years old and set up a single-member LLC Solo 401(k) for her Etsy business in 2020. Josephine earned $120,000 in net income for the year — $50,000 in W2 wages and $70,000 in taxable K-1 business profits. She hasn’t made her contributions yet, but she wants to now to reduce her taxable income for the year and save for retirement. She can max out her 2020 Solo 401(k) contribution limit by:

  • Contributing as an Employee

    Josephine plans to save $19,500 by the tax filing deadline of April 15, 2021, which will reduce her W2 taxable income from $50,000 to $30,500. Assuming she is in a 20% federal tax bracket and a 5% state tax bracket, she’d save $4,450 in tax liability for the year AND setup a considerable nest egg that will compound interest for the next 30+ years. Way to go, Josephine!

  • Contributing as an Employer

    Josephine can save up to 25% of wage compensation not to exceed $57,000 as an employer profit sharing contribution. Since Josephine has taken a W2 wage of $50,000, the company can make a 25% contribution of $12,500. The company lists this employee benefit expense on the S-Corp tax return (Form 1120S). If Josephine contributes $12,500, she will report $57,500 instead of $70,000 in net profit on her K-1 form. Assuming the same tax brackets, she would save $3,125 in tax liability as an employer, so long as she made the contributions by April 15, 2021 – the company tax return deadline. If she files an extension, she can have until October 15, 2021.

All considered, Josephine contributed $32,000 for retirement ($19,500 as employee, $12,500 as employer) and paid $7,575 less in federal and state taxes. That’s a pretty great deal!
If you’d like to maximize your savings, then now is the ideal time to begin coordinating with your accountant and 401(k) plan provider.

Ubiquity is happy to help you set up a new Solo 401(k). We’ve offered a low, flat monthly fee since 1999.

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Best 401k for the Self-Employed

Dylan Telerski / 5 Nov 2020 / Business

Self-employed man working from home and learning about the benefits of a solo 401k

By the end of 2020, there could be 42 million self-employed Americans – accounting for roughly a third of all working professionals.

One of the potential pitfalls of working for yourself is that you don’t have anyone looking over your shoulder to ensure you save for your retirement. It’s all up to you to figure out on your own. Fortunately, the Solo 401k is an excellent option for self-employed workers to build their future retirement nest egg and save on their tax obligations today.

Solo 401k: The Best 401k for Self-employed Workers

Ubiquity recommends a Solo 401k, whether you’re a self-employed entrepreneur or a business owner with no full-time, regular employees. Here is everything you need to know about this great savings opportunity:

  • Who is eligible:

    A self-employed worker or business owner can set up a Solo 401k, so long as there are no “full-time, regular employees.” You can have 1099 freelancers, part-time workers with under 1,000 hours, nonresident aliens, and children under 21 working for you. A spouse working for the business can also participate in your Solo 401k plan to double the household savings amount.

  • How much you can save:

    You’re allowed to set aside up to 100% of your income, to a maximum of $57,000, as an “employee” in 2020. A $6,000 catchup contribution is allowed for those over 50. In your capacity as an “employer” (of yourself), you can contribute up to 25% of net self-employment income (net profit – half your self-employment tax + plan contributions you made for yourself). The maximum employer + employee total for 2020 is $285,000. If your spouse is in the plan, you can double this figure. You may also elect not to make any contributions if finances are tight this year.

  • Tax advantage:

    A Solo 401k works like any employer-offered 401k with pre-tax contributions. Distributions can be taken without penalty after age 59.5 and must be taken at age 70.5 – at which point taxes are paid on the amounts withdrawn.

Get Your Complimentary Guide to Solo 401(k) plans


Alternatives to the Solo 401k for Self-Employed Workers

Other retirement savings options for self-employed include:

  • Traditional or Roth IRAs – ideal for those just starting out to save up to $6,000 a year, plus a $1,000 catchup contribution for over 50. Tax deductions are available for traditional IRAs, whereas Roth IRAs allow for tax-free withdrawals in retirement.
  • SEP IRAs – allow up to 25% of self-employment earnings to a maximum of $57,000. This amount can be deducted on a personal tax return. Distributions in retirement are taxed as income. If you have employees, you must contribute an equal percentage of salary for each one.
  • SIMPLE IRAs – are good for larger businesses with up to 100 employees, allowing up to $13,500 in 2020, plus a $3,000 catchup contribution. Money put into the account is deductible, but distributions are taxed in retirement. Employee contributions are deductible as a business expense. You may contribute matching contributions up to 3% or fixed contributions of 2%.
  • Detailed Benefit Plans – are fit for self-employed individuals with no employees who have a high income and want to maximize savings on an ongoing basis. Also called a pension plan, contribution limits are based on the benefit you’ll receive at retirement, your age, and your expected investment returns. These plans are expensive to administer and require ongoing funding commitments. If you need to stash $50,000 to $80,000 more, it makes sense to pursue a pension – but, otherwise, there are better options.

How to Set Up a Solo 401k

You can open a Solo 401k quickly and easily online with Ubiquity. Compared to other types of 401k accounts, a Solo 401k is simpler to administer. Some self-employed business owners tackle their own administrative duties – making contributions, keeping records, and filing tax returns and IRS documents. This approach requires organization, financial knowledge, and assumed liability for keeping your books straight. You may need a broker to help orchestrate specific investments unless you take a DIY approach and trade online.

Another option is to hire a Certified Public Accountant. These professionals charge, on average, over $450 just to help you prepare the annual Form 1040 with Schedule C.

At $18/month, hiring Ubiquity to oversee your plan administration provides much more value for your money. We’ll file your plan documents, inform you of new plan tax credits, and keep up with Form 5500 every year once your account balance exceeds $250,000.

We can automate deductions for you if you wish, keep detailed records of your contributions, monitor your account to make sure that you aren’t depositing too much, facilitate loans, and pay out distributions. Our administration is available for a low flat monthly rate. Connect with a Ubiquity retirement expert to get started.

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Why Now is a Good Time to Start a 401(k)

Dylan Telerski / 4 Aug 2020 / Business

4 coworkers look at financial paperwork together, wearing PPE to prevent the spread of coronavirus

It may seem counterintuitive to put money into a 401(k) amid Stock Market volatility, but that’s just what financial advisors are recommending. It’s not just a matter of doing your part to keep the American economy afloat, but historically speaking, it’s a matter of good investment.

Here’s why:

It’s a buyer’s market.

“Buy low, sell high” is the conventional wisdom. The opportunity to buy a greater volume of stocks at rock-bottom prices is now! Beginner 401(k) investors can put a small, fixed amount – say $1,000 – into their account every month, regardless of how bleak the situation appears. They can invest in undervalued stocks that pay dividends. By contributing to an employer-sponsored 401(k) plan, retirement savers can choose a diverse portfolio of stocks, bonds, and alternative investments to invest in.

The economy will bounce back.

Here’s the good news: since 1900, the average economic recession has lasted 15 months with an average cumulative loss of 38 percent, while the subsequent expansion has lasted 6.5 years, with returns averaging 339 percent. While you can never guarantee what will occur this time around, history indicates “what goes down must come up.”

There are short-term savings to consider.

If you’re an entrepreneur, the cost of starting a small business 401(k) is deductible on your taxes. In fact, thanks to the SECURE Act passed last year, you may be eligible to receive a tax credit of up to $5,000 per year for the first three years of the plan.

On top of that, if you sign up your employees using auto-enrollment, you can add an additional $500 tax credit per year for the first three years. PLUS, you are eligible to write off 100% of the matching contributions you make to employee plans AND 25% of whatever your employees put into their own plans as well.

Your employees will be able to deduct up to $19,500 off their income tax burden if they elect to contribute up to the 2020 maximum. Those over 50 who got a late start can throw in an extra $6,500 on top of that. If you are contributing to your own 401(k) as both business owner and employee, you can put away up to $57,000 in tax-free income this year to reduce your liability to Uncle Sam.

There are long-term benefits, too.

For business owners, a 401(k) is one of the most competitive benefits you can offer your employees – not to mention, it is less expensive to run than a health care program. Providing workers with financial security boosts the morale of younger workers and enables older workers to leave when they are mentally ready, rather than sticking it out long after their motivation has dwindled because they can’t afford to retire.

For individuals, saving money for the future in a tax-deferred 401(k) account allows any profit and interest gained to compound over the years. The average return over a decade has been a steady 7 percent, which outpaces inflation and sets you up for a comfortable monthly stipend when you stop working. So, for a younger worker, a $5,000 balance today could be worth $57,900 in 35 years.

It’s best not to try to time the market.

The Stock Market is unpredictable at best. As Heraclitus opined, “The only constant in life is change.” Investments generally tend to boom during bull markets and shrink during bear markets, but there are still safer places to park your money during a slide.

Most investors will look at a middle-ground defensive strategy that involves rebalancing the portfolio with more put into stable, large-cap companies that are less affected by economic downturns or a long-term target-date fund. After all, Americans are still buying toilet paper, food, and other necessities. Shifting money away from less-secure growth companies is equally wise, as many of these upstarts lack the financial security to survive.

If you have any questions, contact Ubiquity, a leading 401(k) plan provider that small businesses have relied upon for flat-rate service with no hidden fees since 1999.

Due to the economic downturn sparked by the coronavirus pandemic, many employers have suspended 401(k) match contributions for their employees. Cutting out company matches can have enormous repercussions to diligent savers who counted on this employment perk to help build their financial futures. Here we discuss how the COVID-19 crisis has affected 401(k) matches so far, how it will likely affect businesses great and small in the coming months, and what you can do if your employer suspends its match.

Very Small Businesses Suspend Employer 401(k) Matches

Plans with 25 or fewer 401(k) plan participants stopped matching contributions at 5x the rate of companies with 100+ participants between January and May, according to the latest reports. Drawing on data from over 116,500 retirement plans, researchers found employer contributions decreased overall by 11.4% from March through May. The move was driven by business interruptions and closures. Industries like health care, social assistance, accommodation, food service, and retail were particularly affected.

SMB 401(k) Providers Stay the Course

As of June 2020, nearly 90 percent of plan sponsors said they made no change to employer contributions, according to a Plan Sponsor Council of America survey. Only 5% of plan sponsors suspended their match, 1% reduced them, and another 2.9% were actively considering some type of change.

PSCA Research Director Hattie Greenan explained, “Employers, doubtless helped by support from the Payroll Protection Program, are responding to current conditions by largely staying the course.”

Corporations with Over 5,000 Employees More Likely to Slash Retirement Matches

On the other hand, large firms employing more than 5,000 workers were more likely to pause 401(k) matching, with 11.6% doing so. Amtrak, Best Buy, La-Z-Boy, Sabre Corp, Marriott Vacations, Choice Hotels, Lands’ End, Tenet Health, Quest Diagnostics, Macy’s, and Norwegian Cruise Lines have all pulled back on matching contributions in the wake of the coronavirus pandemic.

The Fallout May Continue

Willis Towers Watson surveyed 543 companies in June and found that 15 percent had suspended or reduced their match. Another 10 percent said they are considering action. Further, 7 percent suspended nonelective contributions, and another 7 percent are considering it.

When Will Employer 401(k) Matches Resume?

We’ve seen employer matches fall by the wayside in the past. The 2008 financial crisis also prompted companies to scale back on their employee benefits. From 2007 to 2009, about 10% of 401(k) plan sponsors stopped making matching contributions, and another 10% ceased elective profit-sharing or nonmatching employer contributions. Five years after the matches dried up, the Chicago Tribune reported the contributions were “making a comeback.”

Thirty-four percent of employers who cut benefits during the current crisis said they had “no set date” for reinstating benefits, but may “at some point.” Eleven percent weren’t sure what the future would hold. Another four percent indicated the change could be permanent.

Other employers had a more concrete timetable in mind – 16 percent planned to reinstate matching “sometime this year,” 32 percent cited “the first or second quarter of 2021,” and 3 percent cited “the second half of next year.”

Specifically, Hewlett-Packard announced a temporarily suspended match from July 1 through December 31, 2020. Allegheny Technologies suspended their company contributions from June 1 through “no later than December 31, 2021.”

On a positive note, Ascensus found that 7.5 percent of the businesses that cut 401(k) matches in March had reinstated them by May.

What to Do If Your Employer Match is Suspended or Cut

If you can afford it, ramp up your own contributions temporarily to compensate for the missing matched funds. Financial advisors recommend most people setting aside 12 to 15 percent of their gross income for retirement each year, so you’ll want to bridge the gap if you can. If you’ve gotten off to a late start, you should invest 18 to 20 percent. You can justify the expense, as you won’t be vacationing, eating out, or spending as much during the pandemic. Remember, what you put in this year will reduce your tax burden.

If finances are really rough this year, let yourself off the hook and pledge to ramp up as soon as you can. Ask your 401(k) plan provider about options like taking out early distributions or borrowing from your 401(k) if you’ve exhausted other options.

Getting insight into how much companies are matching on 401(k)s in 2020 will help you know how well your employer stacks up and whether you’re in the right ballpark with your contributions.

Long gone are the days where a full pension or government stipend will guarantee you a secure future. These sources of income typically comprise less than half of what you would need to live comfortably in retirement. A 401(k) investment account is one of the best strategies to bridge the gap and save enough money for your post-retirement years.

In addition to the contribution deducted from your paycheck, about 51% of employers offering a 401(k) agree to match a certain amount of employee contributions. This generous bonus is literally FREE MONEY that employers add to your retirement savings that will gain interest and compound over time to help you reach your goals faster. There is, however, one caveat to the employer match – in most cases (with the exception of a Safe Harbor nonelective match), how much you receive depends on how much you put in.

Why Do Employers Match 401(k) Contributions?

Why would employers match 401(k) contributions? Perhaps the foremost reason is that employers view the matching contribution as a means of attracting and retaining top talent so that they don’t have to continually hire and retrain a revolving door of workers.

It’s also in their best interest to encourage as many eligible employees to participate in the plan and save as much as they can so the highly-compensated employees and business owners can contribute the maximum amounts to their own plans without failing annual IRS tests for fairness and nondiscrimination.

Favorable tax benefits make it even easier for companies to offer this benefit to their workers. Employers can deduct 100% of their matching contributions on their federal income tax returns, as well as 25% of what all eligible employees contribute.

What Is the Best Possible 401(k) Employer Match?

Employers rarely match 100% of employee contributions. Even if they do, there is a limit mandated by the IRS. For 2020, employees can contribute up to $19,500 to their 401(k) accounts. Employers can contribute up to $37,500 to reach a combined employee/employer total of $57,000. Employees over 50 can add $6,500 in “catch-up contributions” as well. So that would represent the best possible match – an extra $37,500 put toward your retirement.

How Much Do Companies Typically Match?

More commonly, companies follow a formula to determine their matching contribution. A “50% match” means that for every dollar an employee puts in, the employer adds 50 cents. A “100% match” means the employer puts in a dollar for every dollar the employee contributes. On average, companies donate an extra 4.3% of a person’s pay into their retirement accounts as a bonus.

A 2019 Vanguard study identified the most common 401(k) match scenarios:

  • About 71% of companies choose: 50% match, up to 6% of the employee’s pay
  • Another 21% of companies prefer: 100% match on the first 3%, 50% match on the next 2% (Safe Harbor)
  • 6% of companies selected: A single or multi-tiered formula, capped at a certain amount (like $2,000)
  • 2% of companies opted for: A variable formula based on age, tenure, and other variables.

The Bottom Line:

Financial advisors recommend contributing enough to receive the maximum employer match, though you can always contribute more as long as you don’t exceed your $19,500 limit. Turning down free money doesn’t make sense unless your 401(k) performance is so poor it’s not generating returns. Consulting with the 401(k) plan provider can help you ensure you’re on track to reaching your savings goal. Just be sure you’re signed up with a fee-only small business 401(k) provider like Ubiquity who doesn’t erode your savings by charging for Assets Under Management or Per-Participant fees.

If your company has been forced to lay off employees during the coronavirus pandemic, you can expect closer scrutiny from your 401(k) plan auditors this year.

Be prepared to provide more financial documentation than usual, including information on vesting, benefit disbursement, and investments.

The auditor will look to make sure the plan is operating in accordance with the plan-related documents, the Department of Labor requirements, and Internal Revenue Service regulations. Most plans are subject to passing annual IRS nondiscrimination tests to prove that the 401(k) plan is not merely a tax haven for Highly Compensated Employees, but rather, serves as a benefit to all. Form 5500 will be assessed to ensure all financial information has been reported accurately and completely.

If your 401(k) plan has 120 or more eligible participants on the first day of the plan year, an audit is required. Once you’ve been audited, you will be subject to the same procedure every year unless the eligible participant number dips below 100.

How Layoffs Can Impact a 401(k) Plan Audit

If you’ve laid off workers this year, you can expect 401(k) plan auditors to:

  • Pull bigger samples – When employees are laid off, the number of distributions and the distribution amounts tend to increase, attracting the attention of auditors. Auditors base the samples they audit on the number of transactions and total dollar amounts, so they may pull larger samples for testing purposes.
  • Request additional disclosures – One of the key reasons for a 401(k) plan audit is to protect employee benefit plans from fraud, such as misappropriation of assets or fraudulent financial reporting. Additional financial documents may be required to provide context about the plan’s vesting, eligibility requirements, benefit disbursements, and valuation of investments.
  • Vesting may be scrutinized – If 20 percent or more of your employees were laid off, it is considered a “partial termination” and the IRS requires that affected employees become immediately fully vested.
  • Ask more questions – Any new procedures of controls added to the plan amid the pandemic will go under a microscope. Auditors may ask what market fluctuations and concerns prompted changes to the 401(k) plan. They will be checking to see that all the old methods were followed by the letter up until the time the formally requested change kicked in.

How to Prepare for the 401(k) Audit after Layoffs

Large plans have until July 31, 2020, to complete their audits. If an extension is filed, they can have until October 31 to have the plan assessed.

Auditors will need access to HR, Payroll, and Financial information for each employee in the plan. You’ll need to provide:

  • Executed plan documents and amendments
  • The current year census
  • Last year’s Form 5500
  • Distribution forms
  • IRS determination letter
  • Participant statement and trust reports
  • Plan sponsor financial statements
  • W2s and annual payroll registers
  • Loan documents
  • Certification reports for the plan custodian
  • Discrimination tests
  • SAS 70 report
  • Form 1099 for distributions

In addition to assembling all of the above documents, here’s how employers can prepare:

  • Put a person in charge of process review: It’s imperative that a point person who understands all plan processes is on hand to answer any questions the auditor may have. Maybe this person is someone in HR, or maybe it’s your 401(k) plan provider. Have that responsibility clearly delegated. Now is also a good time to remove access to plan website for laid-off employees (if you haven’t already) and review security measures designed to prevent fraud.
  • Contact your auditor as soon as possible: Auditors are likely under compressed schedules due to the COVID-19 crisis and may even be working remotely from home. It’s wise to reach out with any questions about the auditing process as soon as possible to ensure everything runs smoothly.
  • Contact your 401(k) plan provider: Now that you have fewer employees, the contributions from Highly Compensated Employees may start looking a bit top-heavy. Your plan provider can help you perform projections through the end of the plan year to determine whether failure is imminent and even add a Safe Harbor provision to help you avoid testing altogether.

Do you have additional questions about 401(k) plans, layoffs, and furloughs? Contact Ubiquity for assistance.

Since day one, our mission has been to help under-served populations of the workforce like small businesses save for their future. The gig economy is no exception. Especially during this trying time, we want to thank those contract workers who are keeping our economy moving, including food and package delivery drivers.

Historically speaking, one of the greatest perks of gig work is the flexibility, yet contract workers still lack flexible and well-rounded benefits. The discussion of portable benefits has picked up steam recently with millions of independent contractors putting their health in jeopardy to bring home a paycheck due to COVID-19.

From a retirement savings perspective, portable benefits would be an absolute game-changer.

Right now, there are some solutions that contract workers can pursue themselves, like signing up for a solo 401(k) or saving through an IRA. But with a more cohesive plan for portable retirement benefits, gig workers would have even greater accessibility to tax-advantaged accounts with higher contribution limits.

We’ve been in the benefits space for over 20 years and haven’t seen an innovation quite as thought-provoking as portable benefits. If you employ independent contractors, here are some things to keep in mind as this news develops:

Portable benefits provide transparency

Transparency is a virtue. Take a second to ask: What is it like working for me? The environment you’re creating should include a level of confidence and care for your employees. If you’re providing some type of benefits for those contract workers, let your prospective employees and customers know.

In this case, one size does fit all

If portable benefits are under serious consideration, make sure what you are providing is inclusive. Any benefits you implement, whether retirement savings or other, must be something everyone can use. Don’t offer perks for one sector of the population that won’t work for the other.

Look to the future

There will be turnover. It’s part of the gig world, and demand in certain areas will fluctuate over time. The hiring of food delivery drivers might be at an all-time high right now, but what will happen when it’s safe for everyone to eat in restaurants again? Your benefits offerings should be structured to weather these changes.

As the gig economy continues to grow, benefits offerings need to grow with it. Right now, the vast majority of gig employers are not offering retirement benefits at all, but we expect things to change with the rise of portable benefits.

At Ubiquity Retirement + Savings, we are here as your savings advocates. We’ve adapted our offerings through our 20-year history and we aren’t stopping now. We will continue to monitor for updates on portable benefits-related legislation and implementation to help you save for your future the most effective way possible.


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

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

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