Retirement Plans

Maximum Pension Limits for 2021


Many employee benefits are subject to annual dollar limits that are occasionally increased due to inflation. The Internal Revenue Service (IRS) recently announced cost-of-living adjustments to the annual dollar limits for various welfare and retirement plan limits for 2021. Most of the limits will remain the same, but some of the limits will increase effective January 1, 2021.

The following are some important limits in effect for 2021:

  • Maximum compensation for plan purposes is $290,000
  • Maximum monthly benefit for defined benefit plans ages 62 to 65 is the lesser of 100% of compensation or $19,166.67 with an annual benefit $230,000
  • Highly Compensated Employee compensation $130,000+
  • Maximum Defined Contribution / Profit Sharing Contribution $58,000
  • Maximum SEP Contribution $58,000
  • Maximum 401(k) Contribution $19,500. Catch-up Contribution for age 50 and over $6,500
  • Maximum SIMPLE Contribution $13,500

Plan Ahead

Employers should update their benefit plan designs with these new limits, and make sure that their plan will reflect the new 2021 limits. Employers may also want to communicate the new benefit plan limits to their employees.

Click here to read the full IRS announcement.

Retirement Plans

5 Reasons to have a Qualified Retirement Plan – Even If You are a Sole Proprietor

You are a successful business owner. You put a lot of hard work into building your business, and you are finally reaping the benefits. However, there may come a time when you’ll want to step back and triumphantly wash your hands of the business. How do you intend to plan for your financial needs in retirement? 

Many business owners plan on using the sale of their business to fund their retirement. However, they usually don’t take into consideration the additional costs associated with the sale of a business. Expenses such as tax liabilities and brokers’ fees can eat away at the funds you planned on using in your retirement.

Having a qualified retirement plan through your business can help you provide for your retirement.  In addition, it can potentially save you thousands in tax liabilities and benefit both your business and the people who work for it—even if you’re the only one. 

Are these plans the right choice for your business? Before answering this question and looking at potential options, let’s define what it means to have a qualified retirement plan. 

What is a Qualified Employee Retirement Plan?

A qualified retirement plan is one that meets the criteria set forth in section 410(a) of the US federal tax code and the guidelines established by the Employee Retirement Income Security Act (ERISA). These guidelines were established in the 1970s in order to secure workers’ retirement income.

Many companies offer non-qualified plans as part of their total benefits package in the form of deferred compensation or executive bonuses, but these programs have their drawbacks. Contributions to these plans are taxed before they are deposited, reducing the overall amount you have to save.

In contrast, contributions to a qualified retirement plan may be tax-deductible by the employer.  In addition, the contributions are not taxable to the employee when made and grow tax-free until withdrawal, when they are taxed to the employee.  In order to be a qualified retirement plan, a plan must comply with the rules set forth in section 401(a) of the Internal Revenue Code.

Any company can qualify to offer some type of qualified retirement plan. The most common of these plans for single-employee businesses are defined-contribution plans, generally because business owners assume this is their best option. 

Under a defined contribution plan, an employer makes a certain contribution for its employees, and the retirement benefit depends upon the performance of the plan’s investments. The employees are not guaranteed a specific benefit. The most well-known type of defined-contribution plan is the 401(k) plan, which allows employees to make pre-tax contributions to the plan. Often an employer will match a portion of the employees’ contributions.

Despite the popularity of defined contribution plans, they’re not always the best option for single owner businesses—especially for those with no other employees, a high income, and a desire to save a lot on an ongoing basis. For this kind of business, a defined benefit plan could be the best option.

Before we discuss the five main reasons why you should have a qualified retirement plan, you need to understand the types of plans that are available to you.

What Is a Defined Benefit Plan?

A defined benefit plan is a qualified retirement plan that defines the benefit to be paid to an employee after retirement.  The employer is then required to make contributions to the plan in an amount sufficient to fund the employee’s retirement benefit. Contributions may vary from year to year.  This is different than a defined contribution plan where the annual contribution is determined by formula, but the amount of the benefit may vary depending upon investment performance.

There are limits to how much an employer can contribute to a defined benefit plan.  These limits are determined based on the ages of the employer’s employees, expected investment returns, and the overall benefit to be paid by the plan at retirement. However, a defined benefit plan has higher contribution limits than a defined contribution plan. A defined benefit plan is ideal for small businesses with few employees looking to maximize their annual contributions and retirement benefits.

Now that we’ve covered the basics, let’s explore the five reasons you need a qualified retirement plan.

Reason #1: Tax Advantage

One of the main benefits of offering a qualified retirement plan is the potential tax savings. For many business owners, the idea that they’re obligated to make annual contributions to a qualified retirement plan is a turn-off. It’s a major commitment of funds. 

However, many contributions to qualified retirement plans are tax-deductible. Whatever contribution you make annually to a qualified plan can possibly be written off, reducing your business’s overall tax burden. This is one reason that plans like 401(k) plans are popular, but it also goes for defined benefit retirement plans like pensions. 

In addition, an employee does not pay income taxes on the contribution until distribution of his benefit after retirement. This means that you, as a business owner, can take advantage of two tax savings, while managing to save sufficient funds for a comfortable retirement.

Reason #2: Attract Top Talent

If you’re looking to hire some help with your business, offering a retirement plan for employees will attract high-quality talent to your organization and give them an extra incentive to stick around.

Larger companies that don’t offer qualified retirement plans appear lackluster to potential workers because most major companies do, in fact, offer some kind of plan. On the other hand, for small businesses, a tremendous opportunity exists to elevate themselves above the competition by offering something that many smaller firms don’t.

No matter the size of your business or firm, offering retirement solutions and pension plans can make sure you have only the best talent working for you.

Reason #3: Your Employees Need It

As an employer, you already do a tremendous service to the economy by providing needed goods and services and creating jobs. You can add to that service even further by helping to solve the retirement issue many people face—just give them a concrete solution to the issue.

According to a report by the Center for Financial Services Innovation, 42% of Americans aren’t saving anything at all for retirement. If more employers offered qualified, tax-deductible plans, it’s safe to assume that more people would save for retirement.

Reason #4: You Need It

As a business owner, you need retirement savings just as much as your employees do. When you offer a qualified retirement plan through your business, you can enroll as well. The retirement crisis is not just happening among workers. Somewhere around half of all small business owners only save 10% of their income for retirement. One out of four doesn’t save anything at all.

Without an established retirement plan in place, business owners are generally faced with one option: sell the business to fund retirement. This tactic comes with a lot of uncertainties, including the possibility of a lower-than-expected asking price, or having tax burdens eat into your nest egg. Without a plan, you will be under-prepared at a point when there won’t be much time to act otherwise.

Reason #5: You Can Save a Lot

While qualified retirement plans may seem pricey to set up and maintain, they come with the benefit of high limits to contributions. Individual business owners making more than $80,000 a year can save a good portion of those funds in a defined-benefit plan, making these plans ideal for high-income business owners who are nearing retirement.

You can even start saving money by just setting up a plan. For the first three years, businesses get a $500 tax credit in exchange for initiating a plan. 

For business owners, setting up a qualified retirement plan is a crucial step in preparing for a comfortable retirement. Without one, you may not have the resources available to provide for yourself if the unexpected happens. 

Now that you know why you need a qualified retirement plan, it’s time to take the next step. Contact an RMC professional today to determine the best way to set yourself up for the future.

Retirement Plans

What happens if you live too long?

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So why retirement plans?

Why do businesses want to put their money there?

Their hard-earned money…

First of all everybody knows Americans, just in general are not saving it up for retirement.

We’re always worried about dying too soon…

But what happens if we live too long?

What then?

What do we do?

We don’t have the resources in our retirement years.

This is why a retirement plan is fabulous!

Put money away now in your peak earning years.

Businesses can put this money away all on a tax-favored basis so they save now and plan for tomorrow.

And for this reason defined benefit plans and defined contribution plans are fabulous planning options for business clients.

Retirement Plans

Advantages to a Qualified Retirement Plan

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So some of the advantages to qualified plans are first of all unlike other employee benefit plans, you are not limited based on your business structure.

Yes, it’s an employee benefit plan and what that means is it’s exclusive for businesses and business owners however any type of business structure qualifies…

That’s S-Corps to C-Corps to LLCs…what else, Partnerships, even Sole Proprietors and even better yet a one-person company constitutes a company that is eligible to qualify for this type of plan.

Any size business, if it’s only an owner, employee, there’s no other employees…

No problem!

They’re eligible to qualify for a plan and establish a defined benefit or a defined contribution plan.

They have 10 employees, 100 employees, 1,000 employees…

Every company can establish a defined contribution or a defined benefit plan.

We can also offer designs and structure plans where we can have a defined benefit plan which was a little more meaningful, allows for higher contributions which means potentially more favorable tax treatment.

And we can also add a profit sharing or 401(k) plan component so companies can have 2 types of plans at the same time.

They’re not limited to just one qualified retirement plan.

Retirement Plans

401(k)’s are Killing Business Owners Retirement

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Right now one of the biggest secrets is that 401(k)’s right now are killing business owners retirement.

See the problem is that most business owners are looking at defined benefit plans like 401(k), SEP, simples of those type of things.

In 2019 they are limited by only being able to contribute $19,000 and another $6,000 if you’re over age 50.

In a simple plan, it’s limited even further by $13,000.

So what happens is the owner who’s at risk who is making sure that everybody has employment is being treated as the most junior as the most junior staff is.

Seems a little unfair…

With a defined benefit plan, you can set a plan up so that that business owner is getting the lion’s share of the benefit and what those plans can offer is the largest tax deduction.

Currently available under the IRS codes you can help defer reduce or even eliminate some of your stock market risk, you can use those benefits to buy estate planning tools, and as of 2019 you can guarantee an income of up to $225,000 a year guaranteed for life.

It’s a much better way of offering things to an employer instead of a 401(k).

Retirement Plans

Maximum Pension Limits for 2019

Each year, the IRS sets limits for pension plans. These limits are reviewed annually and adjusted for inflation. The following are some important limits in effect for 2019:

  • Maximum compensation for plan purposes is $280,000
  • Maximum monthly benefit for defined benefit plans ages 62 to 65 is the lesser of 100% of compensation or $18,750 with an annual benefit $225,000
  • Highly Compensated Employee compensation $125,000+
  • Maximum Defined Contribution / Profit Sharing Contribution $56,000
  • Maximum SEP Contribution $56,000
  • Maximum 401(k) Contribution $19,000. Catch-up Contribution for age 50 and over $6,000
  • Maximum SIMPLE Contribution $13,000

CLICK HERE for a PDF copy of the 2019 limits.

Retirement Plans

Cash Balance Plans Vs. Defined Benefit Plans

Retirement planning is a vital part of a company’s business plan.  A business owner can choose from a variety of qualified retirement plans, from a Simplified Employee Pension Plan (SEP) to a 401(k) Plan to a Defined Benefit Plan.  A business owner will generally determine which plan is right for him based on such factors as how much he wants to contribute to a plan, whether the plan offers guaranteed investments, and the nature of the benefits provided by the plan.  A common plan in today’s retirement market is a cash balance plan.

What is a cash balance plan?  A cash balance plan is a defined benefit pension plan that resembles a defined contribution plan.  Instead of defining the benefit to be provided at retirement as a stream of income, like a defined benefit pension plan, a cash balance plan defines the benefit in terms of a stated account balance.  An employer generally contributes a fixed percentage of an employee’s compensation to the employee’s individual account, like a defined contribution plan.  The employee’s actual benefit at retirement depends on how much income the employee’s account balance can generate after retirement.  Whether a cash balance plan is right for your client depends upon a number of factors.  RMC Group can help you decide which retirement plan is best for your client.

Over a period of years, we have discovered that a traditional defined benefit pension plan will often make more sense for your client; especially in cases where your client is a sole proprietor or the business has one owner or few employees.  A traditional defined benefit pension plan is easier to administer than a cash balance plan and has fewer fees.  This may make a traditional defined benefit pension plan more appealing to your client.  However, there may be reasons for your client to consider a cash balance plan.  A cash balance plan may make sense for a business with multiple owners, especially where there is a large age gap between the owners.  A cash balance plan can help to align the contributions for each owner.  On the other hand, a traditional defined benefit pension plan aligns the benefits to be provided at retirement, which could result in unequal contributions for the owners.

RMC Group will review both options with you to help you determine which plan design works best for your client.  We will help you evaluate your client’s goals and expectations to formulate a plan that works best for your client. To request a quote or discuss retirement plans, contact RMC Group at 239.298.8210 or [email protected].

Retirement Plans

Prototype Restatement: Best Practice for a Retirement Plan

If you have a client with an existing qualified retirement plan or who is thinking about adopting a qualified retirement plan, we want to talk to you about our prototype plan document.  Using a prototype plan document is one of the best ways to control the cost of maintaining or adopting a qualified retirement plan.  A custom plan document could cost as much as three times the cost of a prototype document.  In addition, whether your client uses a custom or prototype document, the IRS requires that all plan documents be updated to reflect regulatory changes.  Because an administrator can spread the cost of updating a prototype plan document over its many clients, the cost of updating a prototype plan document is much less than the cost of updating a custom plan document.

RMC Group has a proprietary defined benefit plan document, which has been updated and approved by the IRS as of March 30, 2018.  We are currently restating the plan document of each defined benefit pension plan, which we administer.  Restating an existing plan document is necessary, because, in the event of an IRS audit or plan termination, the IRS will want to see that the document has been updated.

If you have a client, who is thinking about adopting a defined benefit pension plan, you should recommend that your client use our prototype plan document.  The cost is much less than a custom plan document, and, because our prototype plan document has been approved by the IRS, your client can be assured that its plan document meets the requirements of the Code and IRS regulations.  In addition, if you have a client, who does not already use the RMC Group to administer its plan, we are happy to restate your client’s existing plan document.  Again, because our prototype plan document has already been approved by the IRS, we can save your client time and money.  Our fee for the restatement of existing plan documents is $2,500.

Whether you are looking to install a new plan or restate an existing plan, call the RMC Group to see how we can help.  You can contact us at 239-298-8210 or at [email protected].  We look forward to helping you.

Retirement Plans

When a Profit Sharing Plan is Not Enough

Your client has a Profit Sharing/401k Plan that has been in place for several years. He is generally satisfied with the performance of the plan but desires greater retirement benefits than those provided by a Profit Sharing/401k Plan.  In addition, he is interested in putting more money away for retirement.  This is a common problem, as a business grows and becomes more successful, and is easily addressed by the adoption of a defined benefit plan.

The maximum deductible contribution to a Profit Sharing/401k Plan is currently $55,000 per participant.  If we assume that your client is age 55 and plans on retiring at age 65, and we further assume that he will make a $55,000 contribution for 10 years and earn 3% interest, he will have $720,275 at retirement.

If your 55-year old client adopted a defined benefit plan, he could make a contribution of approximately $211,060 per year for ten years and have $2,572,120 at retirement.  In addition, your client could maintain his Profit Sharing/401k Plan. However, in most cases, the contribution to the Profit Sharing/401k Plan would be limited to 6% of compensation, plus the 401k elective contribution and catch up contribution if the participant is age 50 or older.

As part of the annual review of his retirement plan, your client is depending on his advisors to assess his needs and provide options that will meet his objectives. Too often, the client’s CPA is not familiar with the rules regarding qualified pension plans, and, as a result, the opportunity to increase retirement income is not presented to him.  We urge you to discuss the merits of a defined benefit plan with your clients and CPA contacts. Your clients will thank you for it. For more information, contact RMC!

Life Insurance Retirement Plans

Use of Life Insurance Inside Retirement Plan

Qualified retirement plans offer many different investment options.  One option, which is often overlooked, is life insurance.  Under the right circumstances, life insurance can be an attractive investment option for a qualified retirement plan.

There are two basic types of qualified retirement plans.  The first is a defined contribution plan.  In this type of plan, the annual contribution is defined, but the ultimate benefit is not.  Annual contributions are based on a formula set forth in the plan document, generally a percentage of compensation.  Contributions are held in accounts established for plan participants and invested.  The amount of retirement income available to a participant depends upon the investment performance of his account.  401(k) and profit sharing plans are examples of a defined contribution plan.

The second type of qualified retirement plan is a defined benefit plan.  In this type of plan, the ultimate benefit is defined, but the annual contribution is not.  The annual contribution is the amount required to ensure that the plan has sufficient assets to fund the participant’s defined benefit at normal retirement age.  The annual contribution is actuarially determined and may fluctuate depending upon investment performance.  However, there is a type of defined benefit plan, known as a 412(e)(3) plan, where contributions do not fluctuate.  A 412(e)(3) plan is funded with guaranteed insurance company products.  Contributions to a 412(e)(3) plan do not fluctuate, because the investment return is guaranteed by the insurance company.  Investment options in a 412(e)(3) plan are more limited than in other defined benefit plans.

Both defined contribution plans and defined benefit plans may provide death benefits, as long as the death benefits are incidental to the primary purpose of the plan, which is to provide retirement income.  A plan’s death benefits can be funded with life insurance contracts.  The IRS has established two tests to determine whether a plan’s death benefits are incidental.  The first test limits the amount of plan assets spent on life insurance premiums.  This test is usually used in defined contribution plans.  The second test limits death benefits to an amount equal to 100 times the plan’s monthly retirement benefit.  Either test may be used in defined benefit plans.

The following are some of the benefits of using life insurance in a qualified retirement plan:

  • Additional benefit for employees
  • Income replacement
  • Protection from creditors
  • Death benefit may be received income tax fee (less tax on the fair market value of the policy’s cash surrender value)
  • Portable benefit
  • Employer provided death benefit may replace insurance paid for by employee
  • Higher benefit at death

Generally, a retirement plan may not provide a death benefit once a participant has attained normal retirement age and retired.  If the participant desires to maintain the life insurance protection, there are a number of options.  The plan can distribute the policy to the participant, who is then required to include the fair market value of the policy in taxable income.  Or, the participant can purchase the policy from the plan for its fair market value.  As long as the participant pays the fair market value for the policy, there should be no tax.

The rules regarding the use of life insurance in qualified retirement plans are complex.  RMC Group is here to assist you in helping your clients determine whether to include life insurance in their qualified plans.