As a CPA your clients trust you to provide accurate information about taxes each year and expect you to file their taxes without any omissions or errors. These days’ clients also expect their CPA to provide information about tax deductions which they may not be aware.
Retirement plans can provide some of the largest tax deductions for self employed individuals or small business owners. In a world where people wear multiple hats, clients expect their CPA’s to be able to provide basic information about different types of retirement plans and if these plans would save them any taxes.
We are here to help CPA’s achieve this and have condensed information into simple points so that CPA’s can advise clients about retirement plan options. We also provide end to end solutions if the clients decide to go ahead and establish a retirement plan. Please feel free to reach out to us at info@pensiondeductions.com if you have any questions.
What type of entity can establish a retirement plan?
All types of entities can establish a defined benefit plan. Please refer to the information below on where to deduct the contributions made to the retirement plans for different types of entities and what can be considered as compensation.
- Sole proprietorship
- LLC taxed as S-Corp
- LLC taxed as a partnership
- Partnerships
- S-Corp
- C-Corp
What type of a retirement plan can/should my client establish?
There can be various ways to determine this, but we narrow it down to two variables that are crucial in the decision making process. These are:
- Employees: Does your client’s business have employees (Yes/No)?
- Free Cash Flow: How much free cash flow does your client have that they are willing and able to put aside for the plan year?
The table below gives you an easy way to determine the appropriate retirement plan for your client. Just select the appropriate box you identify your client in and read about the plan below. All contributions to a retirement plan are tax deductible, so there would be significant tax savings as well. Feel free to email us at info@pensiondeductions.com if you have any questions.
| My Client does not have employees | My client has employees | |
|---|---|---|
| Low Cash Flow | 401(k) Plan | 401(k) Plan with Safe Harbor Match |
|---|---|---|
|
|
Allows Contributions up to $19,000 if your client is below the age 50, and an additional $6,000 if client age above 50. |
Allows contributions up to $19,000 and a contribution of 4% of W-2 compensation for the owner. Employee will also receive mathcing contribution upto 4% of compensation to thier own 40i1(k) plan. If emplyees does not contribute to 401(k), client does not need to give them any money. |
| Medium Cash Flow | Profit Sharing Plan | New Comparability profit sharing 401(k) Plan |
|---|---|---|
|
|
Maximum contribution limit is the lesser of 25% of compensation (earned income) or $56,000. if client is above 50, a 401(k) component can be added that will allow them to contribute an additional $6,000 as catch up contributions. |
Client can contribute the lesser of 25% of compensation or $56,000. Employees will receive an allocation based on their age and compensation and the plan administrator will perform non discriminatory testing. Employees typically receive between 5% to 7.5% of their compensation. |
| HighCash Flow | Defined Benefit Plan | Floor offset Defined Benefit Plan |
|---|---|---|
|
|
Allows contributions from $60,000 to $300,000 based on age, compensation history and years of service. |
Allows contributions from $60,000 to $300,000 for the owner. Employees will receive an allocation based on their age and compensation in a profit sharing plan. Plan administrator will perform non-discriminatory testing and employees typically receive between 5% to 7.5% of their compensation. |
| All contributions are tax deductible |
|---|
Additional Information about each option
The client does NOT have employees
If your client does NOT have employees, the following plans can prove to be the right choice based on the available free cash flow-
- Low Cash Flow: In this situation your client can opt for the solo/individual 401(k) plan. People under 50 can make contributions of up to $19,000 and those above the age of 50 can make an additional $6,000 contribution adding to a total of $25,000. These limits are adjusted annually by the IRS based on the cost of living increases.
- Medium Cash Flow: Regardless of the size of the business, profit sharing plan is a good plan for a business with medium cash flow or inconsistent cash flow. It allows clients to contribute up to $56,000 annually and provides flexibility in choosing the amount of contributions in any given year. This plan can be beneficial if the company employs the spouse as well and contributions can be made for the spouse, thereby increasing the total amount of contributions.
Largest Cash Flow: With a high cash flow, you can always go for a single life Defined Benefit Plan. Defined Benefit Plans depend on the age and the compensation of the individual and can allow contributions from 60,000 to 300,000 in some situations. You can use our defined benefit calculator to estimate the amount of contributions in the first year. Please read below for more information about a defined benefit plan.
Client HAS Employees
If you have employees, the IRS makes it mandatory that you provide retirement benefits for them. However, the IRS gives significant leeway in allowing the business owners to accumulate higher retirement benefits and provide only the required benefits for the employees. This also means that there are certain compliance tests that need to be done in the retirement plan each year. Based on the criteria discussed earlier, there can be three options for a business with employees.
- Low Cash Flow: Clients can select a 401(k) plan with safe harbor provisions. This plan allows contribution of up to $19,000 for the business owner, and an additional 4% of W-2 compensation. If the business owner is above the age of 50, a catch up contribution of $6,000 can be made. This plan also eliminates some of the mandatory compliance tests and makes the administration very smooth. If the client has low but consistent cash flow, then the safe harbor option is the better choice.
There are two variations of a safe harbor plan:
- 401(k) Plan with Safe Harbor match: For the employees that contribute to their own 401(k), employers ‘match’ 100% the employees’ contributions up to 4% of their compensation. This is the more popular option. This basically means that clients have to contribute only to those employees who defer to the 401(k). If none of the employees defer to the 401(k), no contribution has to be made to the employee retirement plan.
- 401(k) Plan with Safe Harbor non-elective: Irrespective of employees’ contributions, for every eligible employee, the employer contributes 3% of the employee’s compensation. This is ideal for a company where most of the people will defer to their 401(k) plans. The owner of the business can contribute the $19,000 and an additional 3% of W-2 wages for their own retirement.
- Medium Cash Flow: If the owners of the business wish to contribute more towards their own retirement plans, they can choose the New Comparability Profit Sharing Plan. This design allows contributions of up to $56,000 for the owners and a contribution of 5% of W-2 wages may be required for the employees. This plan allows the company to categorize the workers in different classes and allocate different contribution rates to them. The plan sponsor can design the plan to reward certain class of employees with a higher contribution percentage as long as it is within the limits prescribed by the IRS. The company can meet the non-discrimination requirements by setting a minimum contribution rate for all employees and carrying out Non-discrimination testing for the pension plan.
- Largest Cash Flow: The Floor Offset Defined Benefit Plan allows maximum contributions to the owners of the business and requires a contribution of 5% to 7.5% of W-2 wages towards the employees.
One solution isn’t for everyone, get the plan that’s right for your customer. Reach out to us today.
