Are All Retirement Programs Equal? Not in the Least.
Operating in California with its retirement plan mandate doesn't mean business owners have no options when it comes to the selection and implementation of a plan. The necessity of providing a plan is mandatory, but the use of a State Auto-IRA plan is not. That means you as a business owner are free to look into plans that provide more advantages to everyone involved. That's where Prosper Retirement Partners comes into the picture.
We offer options that allow you more control over enrollment qualifications, eligibility standards, schedules for rates and limits, and even withdrawal procedures.
With a state-sponsored Auto-IRA, there is not the same level of flexibility. There will be limits on annual contributions, some income restrictions, and also limits on who can participate. You may find that yourself and your executives are not allowed to participate in that state-sponsored plan.
Contrast that with what we offer. Employers are able to claim more Federal tax credits (up to $5,000/ year, and are free to participate in the plan. You'll also find that the amount you can contribute annually is far superior for everyone.
Before you make any decisions, take a look at what Prosper Retirement Partners has to offer. Our conviction is that business owners have the right to select retirement savings plans that are a good fit for the company, as well as the employees. With our offerings, you have a valuable incentive that attracts the best potential employees, and provides your current employees with another reason to stick around. Take a look at how our plan effectively manages fiduciary liability, simplifies administrative tasks, offers access to great investment opportunities, and allows you to maximize the utilization of tax credits. We're sure that you'll like what you see.
Major Features Comparison
Up to $6,500
|Up to $22,500|
|> After-Tax Contributions||Required||Allowed|
|> Pre-Tax Deferrals||Not Allowed||Allowed|
|Eligibility Restrictions||Restricted by AGI||None|
|Employer Contributions||Not Allowed||Optional|
|Employer Tax Credits||None||Up to $5,500/year|
|Employer Penalties||Up to $5,000/year||None|
What are the “private” alternatives to the State Auto-IRA?
There are basically three different versions of employer-sponsored retirement plans that are tax-qualified under the Internal Revenue Code:
- Profit Sharing Plan organized under section 401(a) - including a 401(k) plan
- Simplified Employee Pension (SEP) Plan organized under section 408(k),
- Savings Incentive Match Plan for Employees (SIMPLE) IRA Plan organized under section 408(p)
[Note: Payroll deduct IRAs are not considered qualified retirement plans and are not exempt from the State Auto-IRA mandates.]
What makes a 401k better than the State Auto-IRA?
A combination of factors make 401k plans a better solution for small business owners and their employees, but the most notable are:
- No AGI limitations around eligibility
- Availability of Federal tax credits (up to $5,500/year)
- Higher individual contribution limits (up to $22,500/year)
- Ability to make elective employer contributions (with vesting)
- Ability to choose your providers and investments
- Availability of payroll-integration
What makes a 401k better than a SIMPLE Plan?
Ever since the introduction of Safe Harbor 401k plans in 1996, the older SIMPLE IRA plans have become less effective. Both are limited to employers with less than 100 employees, but that is their only commonality. The combination of the inherent flexibility of 401k plans and their higher contribution limits, enables Safe Harbor 401k to be less expensive and provide greater benefits.
What is a Roth 401k (v Roth IRA)?
Any 401k plan can be designed to allow participants to defer pre-tax contributions and/or make after-tax contributions. When a Roth feature is included in a 401k plan, it applies modest restrictions that enable after-tax contributions to accumulate tax free; whereby they grow tax-free and are not taxed upon distribution. Although Roth IRAs enjoy the same tax treatment, they have limits around eligibility and the amount allowed that Roth 401ks do not.
How much can owners contribute to a 401k plan?
Every W2 employee can choose to contribute the greater of 100% of compensation or $22,500 in 2023. Furthermore, employees 50+ years of age can contribute an additional $7,500/yr in “catch-up” contributions. So, compared to the lower limits of State Auto-IRAs and SIMPLES, owners can realize much more meaningful tax benefits with a 401k.
Are business owners required to make employer contributions to a 401k?
No. Every 401k plan can be used to simply enable employees to save for their own retirement, whereby any employer contributions are an optional provision that can be elected each year.
Why should business owners consider matching employee contributions?
Beyond the fact that multiple studies have found that employer matching contributions increase employee participation and can be used as a retention tool, there are other benefits to providing some form of contribution matching. For instance, the allowed maximum contributions of owners and executives can be constricted if the other employees do not defer at least a minimum amount.
What is a Pooled Employer Plan (PEP)?
A Pooled Employer Plan (PEP) is a type of trust structure that was created in 2019, which allows unrelated/unaffiliated employers to combine together within a single trust account – versus establishing their own individual trust account. Versus single employer plans that must have their own trust account(s), a PEP is an omnibus trust account to which the identities of Participating Employers are shielded from the trust company.
Why is a PEP the better option for small business owners?
The PEP was specifically designed for small businesses to reduce the fiduciary and administrative burdens of offering a 401k plan. PEPs provide a “turn-key” solution that outsources the three core fiduciaries of a 401k plan (i.e., Plan Sponsor, Plan Administrator and Investment Manager) to professional service providers, thereby indemnifying small business owners.
What other benefits do small business owners get inside a PEP?
Every Participating Employer inside a PEP is relieved of certain obligations, such as acquiring an individual ERISA Fidelity Bond and filing an annual Form 5500. Moreover, for 401k plans with 100+ eligible employees, the PEP relieves them of the annual obligation for a limited scope audit – saving small business owners thousands of dollars each year.
How long does it take to set-up a 401k plan?
With the advent of online 401k providers – like Prosper Retirement, 401k plans can be established within a single business day and ready for enrollment within a week. Although there are timing restrictions based upon each 401(k) plan’s design, these are generally related to notice requirements and employee enrollments.