How to Choose a Retirement Plan

Small Business Guidebook

ADP SMALL BUSINESS GUIDEBOOK Your business is your passion. You’re doing what you love, and you’re in charge.

While growing and developing your business may be your current priority, successful business owners are always looking to the future. Even if you plan to work forever, adding a retirement plan to your business is a smart move. Whether you’re looking to save for your own retirement, get big tax breaks or provide competitive benefits to your employees, retirement plans deliver some big advantages for small business owners. If you’re trying to make sense of how to save for your future as a business owner, this guide contains practical information about how to choose the right plan for you and your business. It doesn’t have to be complicated. Now let’s get started.

1 ADP Small Business Guidebook | How to Choose a Retirement Plan Contents

Section 1 Section 6

Tax Benefits for You and Your Business Making Plan Administration Easy

Section 2 Section 7

Workforce Rewards About Plan Administration

Section 3 Section 8

Substantial Savings Potential Important Plan Dates

Section 4 Section 9

Things to Keep in Mind Ask the Professionals

Section 5 Section 10

Know Your Options Helpful Websites

2 ADP Small Business Guidebook | How to Choose a Retirement Plan Section 1 Tax Benefits for You and Your Business One of the most appealing things about retirement plans is the substantial savings opportunity they offer business owners and their employees. Some plans let you put almost $60,000 away annually for your future, and the tax advantages many plans offer help make them affordable. So, if you’ve gotten a late start at saving, and you’re interested in reducing taxes, a retirement plan is a smart way to do it.

3 ADP Small Business Guidebook | How to Choose a Retirement Plan Retirement Plan Tax Advantages

Pre-Tax Contributions Some retirement plans allow you to save with before tax dollars, which can reduce your taxable income and result in savings on your federal income taxes.

Business Tax Credits Your business may qualify for a business tax credit of up to $500 per year for the first three plan years to apply to plan start-up expenses.

Qualified employers can offset 50% of the costs to establish the plan, up to $500 annually, for each of the plan’s first three years. Check with your tax adviser to see if you qualify for this credit.

Tax Deductions on Employer Contributions You can use your business to fund your retirement when you make employer contributions, which are tax deductible as a business expense.

4 ADP Small Business Guidebook | How to Choose a Retirement Plan Section 2 Workforce Rewards If your business relies on employees to keep it humming, a benefits package with a retirement plan can help you hire and keep valued workers.

5 ADP Small Business Guidebook | How to Choose a Retirement Plan Attract and Retain Employees Today’s workers consider a retirement plan an essential part of an attractive benefits package. In fact, 8 out of 10 workers, when accepting a new position, view financial benefits like a retirement plan a key consideration.1

Build a better workforce Research finds that workers with retirement benefits:

1 Are more satisfied, engaged, loyal and productive.2 2 Save, and save more, than those who do not.3

Saving for Retirement $25,000+ Saved

Satisfied Engaged Loyal Productive With Plan No Plan With Plan No Plan 91% 85% 75% 79% 90% 20% 60% 9%

Financial benefits also encourage healthy turnover and can keep your workforce robust: when older employees are financially prepared, they can retire when they’re ready, which makes room for growth opportunities for other employees and adding fresh talent.

1 Bank of America Merrill Lynch Workplace Benefit Report, June 2012. 2 Bank of America Merrill Lynch Workplace Benefit Report, April 2015. 3 The 2015 Retirement Confidence Survey, Employee Benefit Research Institute (EBRI), April 2015.

6 ADP Small Business Guidebook | How to Choose a Retirement Plan Section 3 Substantial Savings Potential Putting money aside for the future can help you afford the retirement you want, when you’re ready. Retirement plans with high savings limits can help you reach your goals.

7 ADP Small Business Guidebook | How to Choose a Retirement Plan A Solid Plan

If you’re banking on using your business to fund your retirement, you could be making a big mistake:

• Many workers retire sooner than planned — often due to the unexpected, like health problems.1

• Your business may become your biggest asset, but to sell it when you’re ready to retire, you’ll need a buyer — and market conditions could influence its value. This means your business could be worth less than you’d hoped, or you’ll need to put off retiring until you are able to sell.

Even if you love what you do and want to keep doing it, or you plan to use the sale of your business to fund your retirement years, it’s essential to back that plan up with savings. Money you save gives you freedom — to retire when you’re ready, and on your own terms.

1 The 2015 Retirement Confidence Survey, Employee Benefit Research Institute (EBRI), April 2015.

8 ADP Small Business Guidebook | How to Choose a Retirement Plan Section 4 Things to Keep in Mind First, let’s think about the main purpose for the retirement plan. Do you want to offer better benefits to attract talent and keep your existing employees happy? Or maybe you’re concerned about your financial future and are looking for the best way to save. Whatever the reason, there’s a plan that can meet your goals and budget.

9 ADP Small Business Guidebook | How to Choose a Retirement Plan Most business owners add a retirement plan to their benefits package for one or more of the following reasons.

Why do you want one?

Save for your own retirement

Capitalize on tax breaks

Offer more competitive benefits to employees

All of the above

Your income, the size of your business, and certain preferences are also important considerations in your decision: Your self-employment income

The size of your business

Your preferences for funding the plan (with employee or employer money, or both)

Your retirement savings goals

Your interest in providing retirement benefits to employees

Your ability to manage plan administration and maintenance

10 ADP Small Business Guidebook | How to Choose a Retirement Plan Section 5 Know Your Options The most popular types of small business retirement plans include SIMPLE IRA, SEP IRA and small business 401(k) plan. When deciding which is right for your business, consider your business size, your self-employment income, and your preferences regarding plan, such as high contributions or simple administration.

11 ADP Small Business Guidebook | How to Choose a Retirement Plan Decide which is right for you.

Simplified Employee Pension Individual SIMPLE IRA Plan Retirement Accounts (SEP IRA) Savings Incentive Match Plan for Employees or SIMPLE Employers can set up a SEP IRA for themselves and IRA is specifically designed for small businesses. While each of their employees. With a SEP, only employers businesses with as many as 100 employees may use can contribute money to the plan, and it must be an a SIMPLE IRA for their retirement plan solution, it is equal percentage for each employee. SEP IRAs are typically used by small businesses with less than 10 flexible — the employer contribution can change each employees. It allows both employers and employees year, which is a plus if your business has inconsistent to put money in the plan (contributions). Employees cash flow. A SEP IRA allows you to save at a substantial can contribute a percentage of their salary to their amount, and it’s easy to set up and administer. But, accounts and choose how the money is invested, for businesses with many employees, the employer and the employer is required to make an annual contributions of a SEP can be costly. matching contribution. Due to mandatory employer contributions, SIMPLE plans are free of Department of Labor testing requirements. These plans are typically Want more details? Visit the IRS website for resources and low cost, and easy to set up and administer. information about SEP IRA plans.

More information about SIMPLE plans can be found on the IRS website.

12 ADP Small Business Guidebook | How to Choose a Retirement Plan Small Business 401(k) Plan Almost any type of employer can establish a 401(k) plan by the Internal Revenue Code to ensure that a plan — sole proprietors, partnerships, LLCs, corporations and does not benefit owners and other highly compensated even tax-exempt employers. To receive qualified-plan tax employees too much more than the plan benefits other treatment, the employer (who is the plan sponsor) must employees. The Actual Deferral Percentage (ADP) adopt a plan document which specifies everything that’s and Actual Contribution Percentage (ACP) tests must necessary to meet every condition in Internal Revenue be passed in order to satisfy these non-discrimination Code section 401(a). All service providers make available requirements for the plan to get tax-qualified treatment. preapproved documents to make meeting these There are other non-discrimination tests that must requirements easy. be met for a plan to meet Internal Revenue Code requirements, but these are the primary ones. A 401(k) plan offers greater choices in plan design. For example, employers usually can determine eligibility If a plan fails either test, the employer must take based on employee age and service. With a 401(k) plan, corrective action to protect the plan’s taxqualified status employees fund their own retirement accounts, and in the 12-month period following the close of the plan employer contributions are optional. These plans offer high year in which the oversight occurred. Corrective action contribution potential, and employees can take loans from typically may include returning some deferrals (adjusted plan savings. They can elect to match a percentage of the for investment earnings and losses) to HCEs. In some amount employees contribute to the plan — often called cases, correction may involve the forfeiture of some deferral percentage — for the employees participating in matching contributions by HCEs. the plan. Employers can also establish a vesting schedule for contributions made by the employer. Two common Fortunately, many 401(k) plans offer a variety of plan vesting schedules permitted under the Internal Revenue features and services to help simplify these responsibilities Code for employer contribution accounts are 100% vesting through smart plan design. For example, plans that adopt after three years of service, or a graded vesting schedule and follow the rules of a Safe Harbor plan automatically — 20% after two years of service, 20% after each additional pass non-discrimination requirements because they year of service until the employer contribution account is generally require broad based, fully vested employer fully vested after six years of service. contributions. An employer can choose to provide matching contributions or non-elective contributions to 401(k) plans require more maintenance and plan satisfy the safe harbor. administration, and require annual DOL testing. Annual non-discrimination tests for 401(k) plans are mandated Learn more about 401(k) plan setup, eligibility, requirements, and administration on the IRS website.

13 ADP Small Business Guidebook | How to Choose a Retirement Plan How the Plans Compare

SEP IRA SIMPLE IRA Plan Small Business 401(k) Plan

Business Size Available to any size business Available up to 100 employees Any

Contribution Type(s) Employer contributions only • Required employer contributions • Optional employer contributions • Employee contributions allowed • Employee contributions allowed

Annual Employer Contribution None Yes. Either match employee No employer contributions are Requirement contributions dollar for dollar up required except if a Safe Harbor to 3% of compensation (can be plan design is elected reduced to as low as 1% in any 2 out of 5 years) OR contribute 2% of each eligible employee’s compensation (subject to Compensation Limit)

Compensation Limit $265,000 $265,000 applicable to 2% $265,000 nonelective contribution

Age 50+ Catch Up Contributions No Yes, up to $3,000 Yes, up to $6,000

Maximum Saving Opportunity Up to 25% of employees’ For 2016, $25,000 is the maximum Up to the lesser of 25% of compensation (up to maximum annual contribution to a participant’s employees’ compensation (up to compensation limit) or $53,000 account and is based on an employer $265,000 in 2016) or $53,000 (2016) (2016) matching contribution limited to 3% plus catch-up contribution up to of compensation ($12,500 deferral, $6,000 (2016) plus $12,500 maximum match; $3,000 catch-up contribution and $3,000 matching contribution, if applicable). Compensation of at least $416,667 would be required for the $12,500 maximum match. If an employer nonelective contribution of 2% of compensation (limited to $265,000) is elected, the maximum employer contribution is $5,300. 14 ADP Small Business Guidebook | How to Choose a Retirement Plan How the Plans Compare (Cont.)

SEP IRA SIMPLE IRA Plan Small Business 401(k) Plan

Investment Direction Employer chooses how money is Employee chooses how money is Employee chooses how employee invested invested and employer contributions are invested

Loans Every employee who is 21 or older, Each employee who received Employers may choose eligibility is employed by the employer for compensation of at least $5,000 in requirements but may not exclude three of the last five years and has any two preceding years — even if employees who have attained compensation of at least $600 in they’re not consecutive — and who age 21 and are employed by the compensation is expected to get compensation of employer for at least 1 year at least $5,000 in the year for which on is deciding eligibility

Eligible Employees No No Yes (if elected as a plan provision)

Plan Administration Easy Easy Moderate to complex

Required Employer Yes Yes Optional Contribution

Annual Employer Cannot exceed the lesser of 25% of Either match employee contributions Contributions are not mandatory. Contribution Limit (2016) total compensation, or $53,000 dollar for dollar up to 3% of Employee contributions plus compensation (can be reduced to employer matching and/or as low as 1% in any 2 out of 5 years) profit sharing contributions OR contribute 2% of each eligible cannot exceed lesser of 100% of employee’s compensation (up to compensation (up to $265,000) or $265,000) $53,000

Employee Contributions No Yes Yes Allowed

15 ADP Small Business Guidebook | How to Choose a Retirement Plan How the Plans Compare (Cont.)

SEP IRA SIMPLE IRA Plan Small Business 401(k) Plan

Annual Employee Not applicable compensation (up to $265,000) or $18,000 Contribution Limit (2016) $12,500

Age 50+ Catch Up Not applicable $3,000 $6,000 Contributions (2016)

Total Maximum $53,000 $25,000*± $59,000* Contribution (2016)

Loans and Withdrawals • Loans: not permitted • Loans: not permitted • Loans: permitted • Withdrawals: Any time. May be • Withdrawals: Any time. May be • Withdrawals: Not permitted until subject to 10% penalty if under subject to a 25% penalty if taken a “trigger” event occurs, such as age 59 ½. within the first 2 years of certain hardship situations. May beginning participation; 10% be subject to 10% penalty if penalty may apply after that time under age 59 ½. if under age 59 ½.

Required Plan Testing No No Yes. However, Safe Harbor Plan will pass 401(k) ADP and ACP tests if Safe Harbor rules are followed.

* Maximum for an individual who has reached 50 years old ± For 2016, $25,000 is the maximum annual contribution to a participant’s account and is based on an employer matching contribution limited to 3% of compensation ($12,500 deferral, plus $12,500 maximum match; $3,000 catch-up contribution and $3,000 matching contribution, if applicable). Note: Compensation of at least $416,667 would be required for the $12,500 maximum match.

16 ADP Small Business Guidebook | How to Choose a Retirement Plan Section 6 About Plan Administration Like other employer benefits, retirement plans require administration and oversight. Some plans, like SEP and SIMPLE IRAs, have minimal requirements and are fairly easy to maintain. A 401(k) plan can be moderate to complex to administer. Most 401(k) and tax qualified plans are subject to requirements under the Internal Revenue Code and the Employee Retirement Income Security Act (ERISA) that provide minimum standards that protect individuals in retirement plans. SIMPLE and SEP IRAs are not subject to most ERISA requirements.

17 ADP Small Business Guidebook | How to Choose a Retirement Plan Plan Sponsor Responsibilities

Generally, plan sponsor responsibilities include providing required documents and information, filing reports and forms with the Federal government (such as Form 5500 Annual Fiduciaries should: Return Report), and making timely participant contributions, Manage the plan with the exclusive loans and distributions. A written plan document is also purpose of providing the plan’s required. Following its terms is a key responsibility, as it serves retirement benefits to participants as the foundation for guiding day-to-day plan operations. Ensure that the investment menu Under ERISA, plan fiduciaries (including those who manage offers a broad range of diversified the plan and its assets) must act solely in the interest of the investment alternatives plan beneficiaries. The role of the fiduciary should be taken seriously — they can be held personally liable for plan losses Monitor plan investment alternatives so or profits from improper use of plan assets that result from that they remain prudent for the plan their actions. Ensure that the costs of plan Here’s the good news: there are ways to simplify plan administration and help provide some relief from fiduciary administration and investment responsibilities. management are reasonable

To read up on the details about retirement plan fiduciary responsibilities, go to the DOL website.

18 ADP Small Business Guidebook | How to Choose a Retirement Plan Section 7 Making Plan Administration Easy 401(k) plans offer the flexibility to customize the plan according to your business needs and goals, which can include making plan administration easy and helping to limit fiduciary liability through plan features.

19 ADP Small Business Guidebook | How to Choose a Retirement Plan Customize your plan according to your business needs and goals A better plan design can lead to retirement

• As a fiduciary, you may wish to hire a professional to plan success carry out functions you may not have the expertise Many retirement plan providers allow to manage. For example, you may prefer to outsource the for plan customization with features and functions of choosing, diversifying, and monitoring of plan services to help better manage and meet investments to an investment advisor. plan obligations and help participants get • A plan provider you choose can perform many retirement ready: administrative responsibilities for you, such as recordkeeping the flow of money in/out of the plan, Automatic enrollment providing required communications to employees, and performing annual plan testing. Automatic deferral rate increases

• Plan customization options can be used to design a plan Safe Harbor plan design to help fulfill administrative obligations. For example, plans that elect and meet the requirements of a Safe Matching contributions Harbor Plan design, which requires mandatory employer contributions, will pass certain 401(k) nondiscrimination Target date retirement funds plan testing. Investment advice services Remember, the fiduciary is ultimately responsible for for participants making decisions about the plan, including decisions to hire and monitor service providers to help with fiduciary and Compliance support administrative tasks. It’s smart to document the basis for those Trustee services decisions and how they were made. Co-fiduciary investment advice It’s a good idea to consult your trusted advisers for guidance services for plan sponsors in choosing the right type of plan — and plan design features for your business.

20 ADP Small Business Guidebook | How to Choose a Retirement Plan Section 8 Important Plan Dates There are different deadlines for establishing and funding the different types of plans. Keep these dates in mind when getting your plan set up.

21 ADP Small Business Guidebook | How to Choose a Retirement Plan Deadlines for the plan you choose

SEP IRA SIMPLE IRA Plan Small Business 401(k) Plan

Establish the Plan April 15 or due date of tax return, October 1 December 31 including extensions

Fund the Employer April 15 or due date of tax return, April 15 or due date of tax return, April 15 or due date of tax return, Contributions to the Plan including extensions including extensions including extensions

22 ADP Small Business Guidebook | How to Choose a Retirement Plan Section 9 Ask the Professionals While this guide provides useful information about retirement planning, it’s a good idea to speak with your business accountant, tax or financial advisor about it as well. They can help you find a plan that’s the right fit and review the important tax, business and other implications of directing a plan.

23 ADP Small Business Guidebook | How to Choose a Retirement Plan Speak to a Trusted Advisor

Business Accountant Tax preparation and strategy, growth opportunities, risk management, bookkeeping, and general financial planning, organization structure, profit distribution.

Why you might need one The guidance a small business accountant provides can be invaluable, especially if your personal and business finances are closely tied.

Financial Advisor Advice on investment and retirement planning.

Why you might need one: To make sure you and your family are financially prepared for your future.

24 ADP Small Business Guidebook | How to Choose a Retirement Plan Section 10 Helpful Websites

General Plan Information http://www.irs.gov/Retirement-Plans/Plan-Sponsor http://www.dol.gov/ebsa/publications/401kplans.html

Retirement Plan Fiduciary Responsibility http://www.dol.gov/ebsa/publications/ fiduciaryresponsibility.html

25 ADP Small Business Guidebook | How to Choose a Retirement Plan Start as soon as you can — that’s the first rule of planning and saving for the future. A retirement plan is a smart benefit for you, your employees and your business. And now that you know the basics, you’re ready to get started.

To find out about the retirement products and services available to help you access a new road to retirement please contact ADP today. 800-432-401k | visit www.adp.com/401k

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