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Operator: Greetings and welcome to the IRS Program on Retirement Plans for Small Employers and Self-Employed. We're just now to begin, we'll begin with Don. Please go ahead. Donald: Thanks for attending this webinar on Retirement Plans for Small Employers and Self-Employed. I'm Don.

Martin: And I'm Martin. Donald: The information in today's webinar is not official guidance.

Let's get started. Saving for retirement is a lifelong commitment for most people. A retirement plan can help small employers and their employees, and self-employed taxpayers can save for their retirement as well. If you find the plan that's the best fit for your business or other entity, you'll keep it longer, have fewer problems and be more satisfied with your commitment. As we go through today's presentation, we're using plan contribution amounts for 2021 to give you a way to compare the different plans. If you're viewing this as a recording after 2021, please go to for the latest plan and contribution limits. Martin: Slide 2. This presentation takes a quick look at the types of retirement plans available for small businesses and the key features, pros and cons of these plans and the final requirement, if any, to each plan.

The more you know about the types of plans available, the more likely you can pick the best plan for your business. Donald: As we move to Slide 3, many small employers have thought about saving for retirement, but we're too busy running their business or organization to find and adopt a plan. An employer that offers a retirement plan can help employees and the owner save for a more secure future. A retirement plan can also help you attract and keep quality employees. Martin: And there are tax benefits for both the employer and the employee. Donald: Yes, there are Marty. Not only are contributions made to the plan deductible, but the earnings on those contributions grow tax free. Employees are only taxed on benefits when they're distributed from the plan. Also, small employers can claim tax credits for the cost of setting up certain plans.

See plan credit. Also, low-income and moderate-income employees can take a credit of up to 50% of amounts they contribute to certain plans. See for more information. Martin: On to Slide 4. A retirement plan can be adapted by many types of employees from self-employed and sole proprietors to partnerships, corporations and charities. Of course, some will be a better fit than others. No matter how large or small financially successful an employer may be - there is a retirement plan that fit its needs. We view these options on the next slide. Donald: On Slide 5, we talk about the two basic groups of retirement plans we'll discuss. They are IRA-based Plans and Qualified Plans. IRA-based Plans are the least complicated plans to run and include payroll deduction IRAs, simplified employee pension plans known as SEP IRAs and SIMPLE Plans. We'll talk about these momentarily. When you hear Qualified Plans, think of Defined Contribution Plans, which include profit-sharing and 401(k) Plans that we'll cover today and Defined Benefit Plans. Martin: And on to Slide 6, IRA-based Plans are the least complicated plans to administer. Payroll deduction IRAs, SEP IRAs and SIMPLE IRA Plans all use an IRA to hold the contributions. An IRA is set up for each eligible employee and contributions are made to that employee's IRA. Donald: Turning to the next slide, Slide 7, a payroll deduction IRA arrangement can be offered by any employer. It has the fewest legal requirements and is the easiest to administer. An employer doesn't formally adopt a plan or make any contributions. The employer just offers employees the opportunity to have after tax amounts deducted from their pay and then contributed into an IRA. The employer can help set up the IRA or not, employees decide whether and how much to contribute. For 2021 and employee can contribute up to the IRA contribution limit of $6,000 plus an additional $1,000 catch-up contribution if they're age 50 or over. Employees may deduct the contribution under the general rules for IRA deductions, and the employer treats the contributions as ordinary salary or wages. Martin: And on to Slide 8. Next up is a Simplified Employee Pension or SEP IRA. A SEP can be adopted by any employer. A SEP must be established by signing an Official Plan document a form that satisfies certain legal requirements. The document can be an IRS model Form 5305-SEP or an IRS preapproved SEP offered by a financial institution. An eligible employee is at least 21 years of age, worked for the employer three of the last five years and earn $650 or more in compensation during the year. An employer can choose less restrictive eligibility requirements on the adoption agreement for their plan. The employer sets up an IRA for each employee who will meet the plan's eligibility requirements. If the employer decides to contribute to the SEP, contributions must go to all eligible employees and be based on the same percentage of their compensation. There are no employee contributions or deferrals, contributions and deductions are limited to the lesser of $58,000 or 25% of compensation for 2021. Donald: And now on Slide 9, let's talk about the next IRA-based retirement option which is a - a Savings Incentive Match Plan for Employees, also known as a SIMPLE IRA. An employer must have 100 or fewer employees and can't maintain another retirement plan at any time during the year if they're going to sponsor a SIMPLE IRA. It can be easily established by signing IRS Form 5304-SIMPLE or 5305-SIMPLE or an IRS approved document from a financial institution. One IRS model form allows the employer to pick one financial institution to hold the IRAs. The other allows each employee to pick their own financial institution to hold their specific IRA account. A SIMPLE IRA Plan must be offered to all employees with compensation of at least $5,000 in any prior two years, and who are reasonably expected to earn at least $5,000 in the current year. There is no age or hours of service requirement in a SIMPLE IRA. An employer can choose less restrictive eligibility requirements in the adoption agreement. A SIMPLE IRA accepts salary deferrals from employees like a 401(k) Plan does and requires contributions from the employer. Eligible employees can contribute a percentage of their pay through payroll deduction to the plan up to $13,500 in 2021, plus an additional $3,000 if age 50 or over. An employee's salary deferrals are subject to FICA payroll taxes, but they're exempt from federal income tax. Employers are required to contribute to their SIMPLE every year using one or two formulas. They generally can either match employee contributions, dollar for dollar up to 3% of compensation or make a fixed contribution of 2% of compensation for all eligible employees, even for those who do not elect to defer. Whichever formula you choose, must be shared with employees before they make their salary reduction decisions, meaning, before the start of the year. Martin: We're on to Slide 10 With all IR - IRA-based Plans, there is very little administrative paperwork. Administrative expenses are low, and no Form 5500 Series returns are required. While easier to administer, they're less flexible than Qualified Plans. Participants can withdraw money at any time under the usual IRA distribution rules, which may include a 10% additional tax on early distributions if the participant is under the age of 59 1/2. No loans are allowed in an IRA-based Plan. Contributions are limited in a payroll deduction IRA, but it could help jumpstart saving for retirement from employees working for smaller employers. A SIMPLE IRA Plan allows a smaller business to have a plan that allows the salary deferrals without the testing requirements of a 401(k) Plan. A SEP Plan does allow larger employer contributions up to 25% of compensation or $58,000 for 2021. One disadvantage of SEP's and SIMPLE IRA Plans is the eligibility requirements are easy to satisfy.

Employees can work a very limited schedule and be eligible for the plan. Also, as an owner, if you have ownership interest in other businesses, you may be part of a controlled group. So, all employees that work for those related employers that satisfy the eligibility requirements must participate in the IRA-based Plan, no matter which related employer employs them. Donald: Okay, so that's an overview of IRA-based Plans. And now on Slide 11, let's talk about our other major plan category, which are Qualified Plans. Assets in these plans are generally held in a single qualified trust, as opposed to IRA-based Plans, where assets are held in individual IRAs established for each participant. We're covering Profit-Sharing Plans, 401(k) Plans and Defined Benefit Plans here today. These plans are a jump in the administrative burden compared to that associated with IRA-based Plans. Martin: On to Slide 12, We talk about Qualified Plans.

Employees in Qualified Plans enter the plan as participants on the next plan entry date after they reach age 21 and work 1,000 hours over the 12-month period after they are hired. In a Qualified Plan, plan sponsors are required to operate the plan for the benefit of all participants.

Distributions from the plan that generally allowed only after an event specified in the plan, such as retirement, no longer employed, termination of the plan. These plans can allow participants to take loans against their account balances. In a 401(k) Plan, participants that suffer a hardship that meets rules outlined in the plan document can take the hardship distributions from their account. Vesting rules can limit a participant's ownership interest in the employer contributions, like a 401(k) match, requiring up to six years of service to get a 100% ownership of employer contributions. These Qualified Plans generally must file an Annual Form 5500 Series return. And finally, the employer must make sure the plan documents are timely amended for changes in the law. Even an IRS preapproved plan documents must be amended from time to time. A plan document that is not kept up-to-date can jeopardize the plans' tax advantage status.

Donald: Turning to the next slide, Slide 13, let's look at these specific types of Qualified Plans to see what a fit for your small business might be. The first type of Qualified Plan is a Profit-Sharing Plan. And like all Qualified Plans, an employer generally requires all employees who have reached age 21 and worked at least 1,000 hours to participate in the plan. You don't need to have a profit to contribute to a Profit-Sharing Plan. Employer contributions are discretionary.

That means, the employer can decide how much to contribute, and a contribution is not required each year. The contributions you make to a Profit-Sharing Plan must be allocated among the participants by a formula outlined in the plan document. Most plans use a compensation to total compensation and allocation formula. For example, a plan participant who received 5% of the compensation paid to participants during the plan year will receive an allocation equal to 5% of the amount the employer contributes to the plan. Allocations of employer contributions are limited to $58,000 for 2021 or 100% of the participants' compensation. The employers' deduction for contributions made to a Profit-Sharing Plan cannot exceed 25% of the aggregate compensation for all participants. Martin: On to Slide 14, Profit-Sharing Plans generally must file an Annual 5500 Series return. Again, you must make sure your Profit-Sharing Plan is kept up-to-date for any changes in the law or regulations. Employees can make that process easier by adopting a document that's been preapproved by the IRS. It will still need to be amended. It may be easy to keep up with the needed law changes. Profit-Sharing Plans are operated by every type and size of employer. What does the Profit-Sharing Plan offer over the SEP? Donald: I can answer that, Marty. They have the same contribution limits, but a Profit-Sharing Plan offers more flexibility to an employer. Martin: That's right. As a matter of fact, the Profit-Sharing Plan can exclude employees that work less than 1,000 hours during the year, for a SEP, $650 per year and three years gets you into a SEP. At a $15 an hour wage, that's about - as little as about 44 hours a year. A Profit-Sharing Plan can be designed so the contribution and allocations are not the same for all employees, it can allow for loans to participants. A Profit-Sharing Plan that doesn't try to exclude classes of employees or provides different allocation formulas for different groups of employees can be easy to administer. If you design the plan to try to maximize benefits for the owner and minimize benefits to the rank-and-file employees, plan administration becomes much more complex and expensive. If you have ownership interest in other businesses, you may be part of a controlled group. In a Profit-Sharing Plan, you may be able to exclude some of these employees or related employers and still meet coverage requirements. While the SEP will have to include all those who meet the $650 per year requirements. If you're looking for a plan that would allow you and your employees to make your own contributions, that would be a 401(k) Plan. Donald: So on Slide 15, let's start talking about a 401(k) Plan, which is a Profit-Sharing Plan that also allows employees to choose to have a portion of their salary deferred into the plan. It will have the same age 21 and one year of service eligibility requirements as a Profit-Sharing Plan. The plan can leave the decision to defer salary entirely to the employees or the plan can provide that a certain percentage of each employee's compensation will automatically be deferred into the plan until the employee elects, otherwise. Research has shown that if an employee's original decision to defer into the plan is made for them by the plan administrator, employees are more likely to save for retirement. Pre-tax salary deferrals are not subject to federal income taxes but are subject to FICA withholding. Each employee's salary deferrals are limited to no more than $19,500 in 2021, plus an additional $6,500 if age 50 or over by the end of the calendar year. An employer can choose to allow for Roth style after tax deferrals. Roth deferrals are subject to full income tax and FICA withholding. An employer may also choose to offer matching or other employer contributions. The total annual additions to the plan for each employee that's the total of all employee and employer contributions in forfeitures cannot exceed $58,000 or 100% of compensation for 2021 or $64,500, including the $6,500 age 50 catch-up contribution. Martin: Now on to Slide 16, 401(k) Plans require an annual non-discrimination tests. Salary deferrals are tested each year using the Actual Deferral Percentage test or ADP test. This ADP test compares the average percentage of compensation deferred by non-highly compensated employees with the average percentage of compensation deferred by highly compensated employees. If the ADP of the highly compensated employees exceeds the ADP, the non-highly compensated employees by too much, the highly compensated employees will have the deferrals limited or reduced. A plan - must also test matching and other contributions using a similar Actual Contribution Percentage or the ACP test.

You must perform the ADP and ACP tests each year. However, certain 401(k) Plan designs may avoid the testing altogether. These are Safe Harbor Plans In the Safe Harbor 401(k) Plan you can avoid the ADP and ACP testing by making either a minimum matching contribution or fixed contribution for all participants. With the matching contribution option, the employer matches 100% of the first 3% of salary deferred by the non-highly compensated employees, plus 50% for the next 2% of elective deferrals for a total match of 4% of compensation. With the fixed contribution option, the employer makes a non-elective contribution of 3% of compensation for all eligible non-highly compensated participants, including those who don't make any elective deferrals for the year.

Meet the Safe Harbor and there's no ADP testing required. If the match is limited to no more than 6% of compensation, the ACP test has also been satisfied. In exchange for providing this minimum level of contribution for all plan participants, highly compensated employees don't have their deferral limited by the deferral of non-highly compensated employees. Don will explain the Auto Enrollment 401(k) Plans. Donald: Thanks Marty. In an Automatic contribution arrangement, employers automatically enroll new employees in the plan to make salary deferrals unless or until the employee opts out. You can avoid the ADP, ACP testing by adopting a Qualified Automatic Contribution Arrangement or QACA. A QACA will allow the sponsor to skip the ATP test if, first, the Automatic Deferral Percentage or ADP is at least 3% for the first year, but less than 10% for the first year and 15% thereafter. Second, the employer contributes either a matching contribution of 100% of the first 1% of salary deferrals, plus 50% of the next 5% of deferrals or contributes a non-elective contribution of 3% of compensation for all participants, including those who choose not to make any elective deferral. And third, the employer must also provide a notice to the employees of their rights under the plan every year before deferral elections have to be made. A Qualified Automatic Contribution Arrangement or a QACA helps build the largest nest egg for participants, while avoiding the need to perform ADP and ACP 401(k) testing. Martin: And now on to Slide 17, 401(k) Plans are required to file an Annual Form 5500 Series return. Go to 5500 for more information. 401(k) Plans are the most popular plans for employees right now. The Safe Harbor and Automatic Enrollment 401(k) Plans are becoming more popular each year, since they don't limit the salary deferrals of higher paid employees. These plans also may lessen the administrative burden, while increasing the savings rates for all employees. Common features you'll find in all 401(k) Plans are: High contribution limits, fully vested salary deferrals and the Annual Form 5500 filing requirement. Features that employees may choose to include in their 401(k) Plan are: Designated Roth accounts, loans to participants from their accounts, hardship distributions, automatic enrollments and in-service withdrawals. There are pros and cons. Donald: Administrative costs are higher in the 401(k) Plans than for IRA-based Plans and Profit-Sharing Plans. A traditional 401(k) Plan one that doesn't include a Safe Harbor or a QACA must satisfy the ADP and ACP test every year. So it's very easy to make a testing mistake.

Traditional 401(k) Plans allow more flexible employer contributions. However, the contributions and salary deferrals for highly compensated employees will be limited by how much the non-highly compensated employees defer. An exchange for higher required employer contributions, a Safe Harbor 401(k) Plan and a Qualified Automatic Enrollment 401(k) Plan may allow you to avoid ADP and ACP testing altogether. And both plans may increase the savings rates for all your employees and may even lessen your administrative headaches. Martin: And now on to Slide 18 which is the last category, we're discussing are Defined Benefit Plans. Just like a Profit-Sharing and a 401(k)

Plan, the plan must cover all employees age 21, who worked at least 1,000 hours during the plan yield. A Defined Benefit Plan provides for fixed, pre-established benefits for employees at retirement. The employer contributes an amount each year to fund the future benefits for participants. Required contributions are determined by the plans' actuary based on projected benefits and actuarial assumptions. There are no individual participants' accounts, just an accrued benefit. In a Profit-Sharing Plan, the amount that an employee ends up with the retirement is a combination of the contributions made and their earnings on them. So, the risk of that investing falls on the participants. In a Defined Benefit Plan, the contributions go towards funding a future benefit when that participant retires. The investment risk falls on the plan's sponsor, not the employee. Many large employers have decided they don't want to carry that risk and no longer sponsor Defined Benefit Plans. However, Defined Benefit Plans are still attractive to some employers, since they generally will have the largest contributions and deductions for the employer. These plans are the most complex and costly plans to maintain. Donald: Going on to the next slide, Slide 19, Defined Benefit Plans have an Annual Form 5500 filing requirement. They also include - that form also includes a schedule SP that's completed by and signed by the plans' actuary. Since a Defined Benefit Plan generally has a required contribution each year, it's typical to companies with high, stable earnings adopting Defined Benefit Plans. They're also attractive for small employers with highly paid employees that have long service periods. For those high earning, longer service employees, the plan may have only 10 or 15 years to build up enough assets to pay the accrued benefits. That's why a Defined Benefit Plan provides for the largest contribution, deduction and benefit of any retirement plan. A downside of these plans is a contribution is normally required each year, an excise tax applies if the employer doesn't make those required contributions. Martin: And on to Slide 20. That's a quick look at retirement plan options for small employers. A companion piece of this presentation is Publication 3998.

Choosing a retirement solution for your small business. It has a chart that compares the key features of IRA-based Plans and Qualified Plans. Donald: Also, check out the Small Business resources' section at This webinar will be recorded and posted on sometime next month. To check out this recorded webinar and others, select the Business tab and then Retirement Plans on the left navigation of that webpage. Martin: We also have an electronic newsletter, the employee plan news. To read old issues and subscribe, go to news. To leave us feedback on the presentation or request a speaker for your next event, send an email to Donald: On behalf of Marty and myself, thank you for participating in today's webinar.