Group Retirement Plans (401k Plans, SEPs, and IRA’s etc)

How does your employees’ financial health affect your company?

Retirement overview and the “three–legged stool”

If you’re an employer, you already know that most Americans are woefully unprepared for retirement. That’s nothing new. What’s really frightening is the extent to which many Americans are lacking an understanding of the most basic financial concepts, and the toll that lack of understanding takes on a company’s productivity.

How does your employees’ financial health affect your company? One word: stress.

Take credit card debt, add the larger macroeconomic trends of a riskier workplace, throw in the overall decline in the number of Americans covered by pensions and health insurance plans, then top it off with the increase in the average length of unemployment.

What you have, is a recipe for stress and stress related illness—absenteeism and a decline in employee productivity.

Traditionally, most individuals have planned for retirement with the expectation of receiving income from three sources:

  1. government benefits such as Social Security
  2. personal savings and investments
  3. employer–sponsored retirement plans

However, in recent years many have come to doubt the wisdom of this “three–legged stool” approach to retirement planning. Concerns regarding the ongoing availability of Social Security benefits have placed greater emphasis on personal savings and employer–sponsored retirement plans. Although the importance of personal savings and investments is not to be minimized, most people continue to view the employer as the primary provider of retirement benefits.

Congress recognized the importance of retirement benefits provided in the workplace, and offered financial encouragement to employers to set up retirement plans. Certain employer-sponsored retirement plans, referred to as “tax-qualified retirement plans,” are promoted through the grant of special tax incentives to employers who offer such plans, and to employees who participate in them. (While this term has a more precise meaning for employee benefit professionals, we will define “tax-qualified retirement plans” to mean any retirement plan that enjoys special tax privileges under the law.)

401k overview

A 401k is an employer sponsored retirement plan and is grouped into two categories-defined benefit and defined contribution.

  • A defined benefit plan usually links the benefit to the amount of service and is based on the final average salary. Employees can usually predict the monthly retirement income they might receive with this type of plan and might also be given the choice of a lump-sum benefit at retirement.
  • A defined contribution plan is not a defined benefit so the employee cannot predict a monthly retirement income. If an employee leaves the company, they usually receive the proceeds in a current or deferred lump sum or annuity.

Companies are prohibited by law from tapping into the money in their 401k. But if your company goes bankrupt and you have 401k money invested in their stock fund you will likely lose that money, just as in the case with Enron.

Traditional or regular 401K plan

A traditional 401 K plan is established by an employer and lets the employees save a portion of their income before taxes are taken out.

  • A 401K is funded with worker’s pre-tax dollars and employers contributions (if any). Both the growth of the funds, and the employers contributions are tax-deferred, which means you only pay taxes when the money is withdrawn. In that sense, 401Ks are similar to Individual Retirement Accounts (IRA), where the money cannot be withdrawn until the age of 59 and a half, except for special circumstances. However, most employers include an option of obtaining loans against 401K accounts.

Nowadays, a 401K is offered in place of a traditional pension. It can be a very powerful tool to make up the difference between your Social Security payment and the pre-retirement earnings.

Traditional 401(k) contribution limits.

The plan allows each enrolled employee to contribute a certain amount of their salary up to the limits established by employers at the time the plan was set up. The details of those limits vary among employers.

The Internal Revenue Service (IRS), on the other hand, has its own limits. In 2016, the maxim contribution is $18,000. The IRS also allows catch up contributions to the 401K plan for persons who are 50 or older. The catch up contribution limits are as follows: 2016 $6,000

Traditional 401k plan main benefits

  • Account balance grows quickly, because not only are the employer’s and employee’s contributions tax free, but the growth of the funds are also tax free.
  • Your contributions are tax free, which might put you in a lower tax bracket, essentially saving money on federal, and in most cases, state taxes.
  • Portability: when leaving an employer you can take the money with you and put it into the new employer plan or, roll it over to your Individual Retirement Account.
  • You are in control of your money. It is up to you how and where the money is invested.
  • A 401(k) is usually set up as payroll deductions which make saving easy.
  • You are able to invest in large managed funds that have high minimum investment requirements.
  • Most 401(k) plans have a loan option: you borrow from your own account with no penalties (or taxes), and pay it back to yourself, including the loan interest.

SIMPLE 401(k) plans

The SIMPLE 401(k) plan is a cross between a SIMPLE IRA and traditional 401(k) plan and offers the best of both plans – for the most part. Here we review some of the features and benefits of the SIMPLE 401(k) plan and compare it to the traditional 401(k) plan.

SIMPLE 401(k) advantages

  • No Testing – An employer that adopts a traditional 401(k) plan may be required to perform certain non-discrimination and top-heavy testing to ensure that the plan operates in compliance with regulatory requirements. Generally, such testing must be done by professionals who specialize in that area and can be quite costly. SIMPLE 401(k) plans, on the other hand, do not require these tests. This can be very appealing to a small business owner who likes the features of the 401(k), but can’t afford the administration costs of testing.
  • Loans Allowed -Loans can be an attractive feature of a qualified plan because employees and business owners usually like the idea of being able to borrow their own funds and make loan and interest payments to their own accounts. The loan feature can be made available in both SIMPLE and traditional 401(k) plans.

SIMPLE 401(k) disadvantages

  • Immediate Vesting of Contributions – With a traditional 401(k), employer contributions can be subject to a vesting schedule, and this may help to reduce high employee turnover. But contributions to a SIMPLE 401(k) are immediately 100% vested, which means that an employee who meets the requirements to receive distributions from the plan may withdraw his/her entire account balance at any time.
  • Contribution Limits are Lower – Contribution limits for a SIMPLE 401(k) plan are lower than the limits for the traditional 401(k) plan.

Furthermore, employer contributions to an employee’s SIMPLE 401(k) account are limited to 3% of the employee’s compensation, while for the traditional 401(k), the employer may contribute up to 25% of the employee’s compensation. Also, the compensation limit applies to both plans, which means the employer cannot consider compensation in excess of $220,000 (indexed) for plan purposes. Therefore, an employee’s total contribution to a SIMPLE 401(k) plan for 2016 can be as much as $20,450 (salary deferral of $12,500 + 3% contribution of maximum salary of $265,000) + catch-up contributions, while contributions to a traditional 401(k) plan can be as much as $53,000 + catch-up contributions.

  • One Plan Limitation – An employer who establishes a SIMPLE 401(k) plan cannot maintain any other plan for employees who are eligible to participate in the SIMPLE 401(k) plan. By contrast, provided certain requirements are met, an employer who establishes a traditional 401(k) plan may choose to establish a SEP, profit-sharing or other defined-contribution plan, maintain both plans concurrently and allow eligible employees to participate in both plans.

The Safe Harbor 401(k) plan

The Safe Harbor 401(k) Plan allows eligible employees to contribute a portion of their own salary to a retirement plan. Employers contribute either matching or non-elective amounts to the plan on behalf of eligible employees. Employer contributions are tax deductible and employee contributions are excluded from income for Federal Income Tax purposes.

Safe Harbor 401k plans allow both employer and employee contributions up to a maximum of 100% of income or $53,000 (for 2016), whichever is less. Employees over 50 can make additional catch up contributions of $6,000.

While standard 401k plans require you to implement costly discrimination testing to ensure employees of all salary levels participate equally, Safe Harbor 401k plans excuse you from this obligation. In order to take advantage of this, you must make matching contributions to employee salary deferrals – 100% of the first 3% of employee compensation plus 50% of the next 2%. You can also elect to contribute a fixed amount of 3% to all eligible employees. A Safe Harbor 401(k) must be in place before any contributions can be made.

Keep in mind that all eligible employees become 100% vested immediately with a Safe Harbor 401k. You are responsible for administering the plan and keeping records. Also, non-elective contributions must be made regardless of your company’s financial situation. If you decide to halt contributions, you must provide 30 days notice to your employees and you will need to pay for standard discrimination testing.


A SIMPLE IRA is an employer sponsored plan where plan contributions are made to a participating employees IRA. The tax-deferred contributions are higher than a traditional or Roth IRA. The Internal Revenue Code uses the term SIMPLE plan to refer to a SIMPLE IRA. SIMPLE IRA are usually found in companies with less than 100 employees who want to provide an alternative to a qualified profit sharing plan.

SIMPLE IRA Advantages

The benefits of a SIMPLE IRA are totally portable by employees because the funding is held entirely in an IRA for the employee. Employees own their accounts and are always 100% vested and are in complete control their own accounts. Employers can make contributions to a SIMPLE IRA for employees over the age of 70 ½.

SIMPLE IRA Disadvantages

A SIMPLE IRA doesn’t provide an adequate retirement in it’s self. The benefits are not significant unless there the employee makes significant contributions regularly. Annual contributions are usually restricted to lesser amounts than with a qualified plan. The maximum contribution limit for a SIMPLE IRA is for the year 2016 is $12,500 and for a 401K or 403B plan the limit is $18,000

Contributions Limits

Year 2016 and beyond: $12,500

Participants who reach the age of 50 during the plan year may be permitted to catch up contributions in the amounts listed for each year:

Year 2016: $3,000


SEP overview

A Simplified Employee Pension Plan, commonly known as a SEP–IRA, is a retirement plan specifically designed for self-employed people and small-business owners. Its key features are highlighted below. When establishing a SEP-IRA plan for your business, you and any eligible employees establish your own separate SEP-IRA; employer contributions are then made into each eligible employee’s SEP-IRA.

SEP plan eligibility

You can establish a SEP-IRA if you:

  • Are a sole proprietor, in a partnership, or a business owner (of either an unincorporated or incorporated business, including Subchapter S corporations);
  • Earn any self-employed income by providing a service, either full-time or part-time, even if you are already covered by a retirement plan at your full-time job.

SEP tax advantages

Tax-deductible contributions

  • Up to 25% of compensation, as much as $53,000 for the 2016 plan year*

Tax-deferred growth potential

  • Any investment earnings grow tax-deferred until withdrawn.
  • The maximum compensation on which contributions can be based is $265,000 for the 2016 plan year. For self-employed individuals, compensation means earned income.

SEP-IRA deadline

The deadline to open and contribute to a SEP-IRA is:

  • Your tax filing deadline (including any extensions).

For most self-employed individuals and small-business owners, that deadline is usually April 15.

SEP contribution flexibility

No annual contribution required

  • Contribution percentage can vary each year, from 0% – 25% of compensation, $53,000 for the 2016 plan year.*
  • All SEP-IRA contributions must be made by the employer, and the same percentage of compensation must be contributed for each eligible employee (based on W-2 wages) including the employer.
  • The maximum compensation on which contributions can be based is $265,000 for the 2016 plan year. For self-employed individuals, compensation means earned income.

Other SEP advantages and benefits

Plan simplicity

  • No complicated forms to fill out.
  • No annual reports for you to file with the IRS.

Attractive benefit for employees

  • Offering a retirement plan can make it easier to attract and retain valuable employees.

Wide variety of investment choices

  • Mutual funds from many well-known companies
  • Individual securities, including stocks, bonds, and CDs

Assistance and information

  • Dedicated Retirement Specialists are available to answer your questions about retirement plans and investment options. Call 312 263 1590 ext 101

Open a SEP-IRA

Investing in a SEP-IRA is easy. If you’re ready to open a SEP-IRA or transfer your SEP-IRA assets from another institution another, select one of the options below.

  • To get started, Open a No-Fee SEP-IRA.
  • If you would like assistance completing the application or would prefer to discuss your options, call a Retirement Specialist at 312 263 1590 ext 101

Retirement plans comparison available, contact us.

About Optimized Benefits

Optimized Benefits is a Boutique Firm dedicated to providing smart solutions to the small and mid-sized business owners and their Employee Benefits plans
we have a focus on Retirement (401K) and Group Health plans

Contact Us

55 W Wacker Dr 14th Floor
Chicago IL 60601

312 263 1590 X 101

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