Choosing the right retirement plan for your employees. RETIREMENT

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1 Choosing the right retirement plan for your employees. RETIREMENT

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3 What s the best way to compensate your employees? Salary and commission are only one component of compensation. Pensions and other retirement plans have long been a part of compensation packages. Thanks to a wide variety of retirement plan and compensation options, it s easier than ever to offer employees retirement savings solutions. Tax deductions for the business owner and tax-deferred savings for employees make today s retirement plans affordable, manageable and flexible. Would you like that plan qualified or non-qualified? There are two types of retirement plans from which to choose qualified and non-qualified. Both usually delay payments to employees, allowing them to defer tax. The difference is in how you, the employer, are taxed. n A qualified plan allows you to currently deduct contributions to the plan, even though the funds are not taxable to the employee until a future date. n Most non-qualified plans don t allow you to currently deduct contributions to the plan. Your business may receive a deduction when the employee receives the benefits, usually at retirement. Qualified plans must benefit employees on a non-discriminatory basis. Not so with a non-qualified plan. This often makes a nonqualified plan an ideal choice for businesses that can t afford equal benefits for everyone. As an owner, you can choose to benefit yourself and any key employees you select. Or, if your business has maxed out its qualified plan, a non-qualified plan is a great way to provide additional benefits to key employees. 1

4 Qualified plans. There are two types of qualified plans: defined benefit plans and defined contribution plans. Defined benefit plans Defined benefit plans (usually referred to as pension plans), provide employees with monthly payments at retirement based on such factors as age, years of service, and compensation. The employer is responsible for funding the plan and assuming the investment risk. Defined contribution and other retirement plans Defined contribution plans, by contrast, can be funded by both the employer and the employee. The retirement benefits are not guaranteed and the employees have responsibility for managing the investment choices within their accounts. Over the last several years, defined contribution plans have become increasingly popular with employers due to the plans flexibility and lower costs. The most common defined contribution plans are 401(k) plans, but they re not the only option and they may not be the best choice for every business. Other retirement plans, such as Savings Incentive Match Plan for Employees (SIMPLE), SIMPLE IRAs, and Simplified Employee Pension (SEP) plans, offer different features that may be more beneficial to a particular business. While each plan has its own unique features, they all: n Offer one of the best ways to shelter personal and business income from taxes n Allow employees to defer taxes on investment earnings until the money is withdrawn at retirement (possibly at a lower tax rate), which can accelerate the growth of the savings n Provide the caliber of benefit necessary to attract, hire and keep quality employees 2

5 Special start-up tax credit for small businesses. To encourage more Americans to save for retirement, the government now offers special tax incentives to small business owners who establish a retirement plan. An employer who establishes a retirement plan is eligible to receive a tax benefit of 50% of the qualified plan start-up costs, up to a $500 annual credit for the first three plan years.* No matter what type of business you have, you will find several retirement plan options that can offer a variety of benefits for both you and your employees. Tax relief As an employer, your company s contributions to a defined contribution plan are a tax-deductible expense. Your company s taxable income will immediately decrease. Employee satisfaction Employees will appreciate your support in helping them to save for retirement. Offering a defined contribution plan is a simple, inexpensive way to expand your benefits package and increase employee satisfaction. Flexibility and control Today s qualified retirement plans offer businesses the flexibility to meet their plan objectives, such as: n Funding requirements n Contribution amounts n Eligibility n Vesting n Administration n Cost * Please note that Allstate nor its agents and representatives cannot give legal or tax advice. The brief discussion of taxes in this brochure may not be complete or current. The laws and regulations are complex and subject to change. For complete details consult your attorney or tax advisor. 3

6 A comparison of defined contribution plans: 1 Plan Type Contribution Limit Funded by Funding Flexibility Plan Setup Deadline Employer (or sole proprietor): 25% of compensation or $54,000 whichever is less Employer Medium Tax filing deadline (usually April 15), plus extensions SEP 3 Employee: Up to $5,500 as a traditional IRA contribution ($6,500 if 50 or older) in SIMPLE IRA 4 Employee: Maximum is $12,500 ($15,500 if 50 or older) in 2017 Employer: matches employee elective contributions dollar-fordollar up to an amount not exceeding 3% of the employee s compensation Employees; employers must fund matching contributions Low Between January 1 and October 1 The lesser of $54,000 or 100% of compensation Employer High Fiscal year-end (usually December 31) PROFIT SHARING 401(k) 3 Employee: Maximum is $18,000 in 2017 ($24,000 if age 50 or older) Employer/Employee combined: the lesser of $54,000 or 100% of compensation Employees; employers can fund matching contributions High Fiscal year-end (usually December 31) OWNER-ONLY 401(k) 5 Employee: Maximum is $18,000 in 2017 ($24,000 if age 50 or older) Employer/Employee combined: the lesser of $54,000 or 100% of compensation Employees; employers can fund matching contributions High Fiscal year-end (usually December 31) 1 Contribution limits must be aggregated if an employer offers more than one defined contribution plan. Additionally contribution limits must be aggregated if the employee is a participant of multiple employer plans. 2 IRA contributions may be deductible depending on taxpayer s modified adjusted gross income. 3 Employer contribution must be the lesser of $54,000 or 25% of employee compensation to be deductible. 4

7 NOTE: For up-to-date amounts refer to the current year s Tax Chart, ALR1158 Funding Deadline Minimum Employee Coverage Requirements Record Keeping Complexity Plan Admin Cost Best Choice For Tax filing deadline for year of contribution plus extensions Must be offered to all employees who are at least 21 years of age, employed by the employer for 3 of the last 5 years and had earned income of $600 (for 2017) Simple document; no annual filing No significant plan set-up costs Small to medium businesses (most popular with small), self-employed, partnerships and non-profit groups Before tax filing deadline for year of contribution plus extensions Employee contributions must be made during calendar year Must be offered to all employees who have earned income of at least $5,000 in any prior 2 years, and are reasonably expected to earn at least $5,000 in the current year Simple document; annual notice No significant plan set-up costs Small businesses, self-employed and qualified non-profit groups with no more than 100 employees Before tax filing deadline for year of contribution plus extensions Generally, must be offered to all employees at least 21 years of age who worked at least 1,000 hours in a previous year Trust document; annual government filing; may require annual non-discrimination and top-heavy testing Plan set-up costs and ongoing fees Small to large businesses, self-employed, partnerships and non-profit groups Before tax filing deadline for year of contribution plus extensions Employee contributions must be made during calendar year Generally, must be offered to all employees at least 21 years of age who worked at least 1,000 hours in a previous year Trust document; annual government filing; may require annua non-discrimination and top-heavy testing Plan set-up costs and ongoing fees Small to large businesses and qualified non-profit groups Before tax filing deadline for year of contribution plus extensions Employee contributions must be made during calendar year Generally, must be offered to all employees at least 21 years of age who worked at least 1,000 hours in a previous year Annual government filing if plan has more than $250,000 in assets or if there are any non-owner employees in the plan Substantially lower than a 401(k) Owner-only employers, self employed and owners with excludable employees 4 If SIMPLE IRA is offered, it must be the sole defined contribution plan offered by the employer. 5 Owner-only 401(k) plans are designed specifically for owner-only businesses that employ a spouse or the owner s immediate family, including the owner s parents, children and grandchildren. 5

8 Choosing the right retirement plan. As you can see, each of the plans discussed has a unique combination of features. Your company s financial situation and business needs will dictate which plan options are worth considering. Take a moment to examine the following concerns that many business owners face when choosing a retirement plan. This chart can help you identify the plan that best meets your needs and objectives. If your goal is to: Consider: Here s why: Minimize cost Minimize plan administration Tax defer the maximum amount of money each year SIMPLE IRA, SEP and Owner-only 401(k) plans SIMPLE IRA, SEP and Owner-only 401(k) plans Profit Sharing plan combined with a Multi-employee 401(k) plan, Owner-only 401(k) plan and/or SEP plan SIMPLE IRA, SEP or Owner-only 401(k) plans are the lowest cost options available. SIMPLE IRA, SEP or Owner-only 401(k) plans are the easiest plans to set up. Each involves minimal paperwork. Profit Sharing plans combined with a 401(k) plan, SEP and Owneronly 401(k) plans allow for overall contributions of up to $54,000. Make sure employees contribute to the plan SIMPLE IRA, Multi-employee 401(k) and Owner-only 401(k) plans A SIMPLE IRA or 401(k) plan, either Multi-employee or Owner-only plans, are the only retirement plan options that permit employees to make salary deferral contributions to the plan. Make a consistent financial commitment to the plan each year Exclude part-timers from the plan Reward highly compensated employees SIMPLE IRA Profit Sharing plan, Multi-employee 401(k) plan Non-qualified plans, SEPs and Profit Sharing plan. A SIMPLE IRA features mandatory employer contributions. It should only be considered if you can make a financial commitment to the plan each year. A Profit Sharing plan or Multi-employee 401(k) plan allows you to set up stricter eligibility requirements for entering the plan. This often results in excluding all or some part-timers. Non-qualified plans allow for the highest employee and employer contributions. SEPs and Profit Sharing plans permit Social Security integration, which generates a higher contribution percentage for higher paid employees. Have more than 100 employees Multi-employee 401(k) and Profit Sharing plans Exclude SIMPLE IRA, which is limited to businesses with 100 or fewer employees. All other plans, including a Multi-employee 401(k) plan, may be possible options. 6

9 Plan contribution limits. This chart shows the annual maximum contribution limits for a range of income levels, based on the defined contribution plan you choose. Refer to Contribution Limits on page 4 and 5 for more information. Compensation 6 Owner-only 401(k) and Multi-employee 401(k) Plans 3 SIMPLE IRA 4 SEP IRA or Profit Sharing Plan 5 $270,000 $54,000 $20,600 $54,000 $200,000 $54,000 $18,500 $50,000 $150,000 $54,000 $17,000 $37,500 $125,000 $49,250 $16,250 $31,250 $100,000 $43,000 $15,500 $75,000 $36,750 $14,750 $18,750 $50,000 $30,500 $14,000 $12,500 $24,250 $13,250 $6,250 $10,000 $10,000 $10,300 $2,500 Please note that these guidelines are for educational and comparative purposes only and are not meant to serve as financial or tax planning advice. See your tax advisor for guidance on choosing the retirement plan that best fits your needs. 6 Assumes an incorporated business. Lower contribution limits apply for unincorporated owners. Maximum annual compensation considered is $270,000. 7

10 Choosing a retirement plan A real world example: Bill owns a small gardening business with four employees. He wants to set up a retirement plan for his employees because they ve requested one and he knows he can obtain a tax deduction for his company s contributions to the plan. He is not sure if he wants his employees to contribute to the plan, but he knows that his business can only get a deduction if it contributes to the plan. Bill has determined that there are three different plan types that would be suitable for his company and his employees: SIMPLE IRA, SEP and 401(k) plans. Let s assume Bill decides to defer the maximum amount, and his employees decide to defer the amounts shown for each of the different plans. He chooses to offer a generous employer contribution. Based on his salary of $100,000, his personal tax savings varies under each plan. Below are the contributions and tax savings for the business under each plan type. SIMPLE IRA Employer/ Employee Salary Employee Deferrals 7 Employer s Contributions 12 Total Contributions Employer s Tax Savings 8 Bill Charlie Doug Evan Frank $100,000 $35,000 $30,000 $12,500 $5,500 $4,500 $4,000 $4,000 $3,000 $1,050 $900 $750 $750 $15,500 $6,550 $5,400 $4,750 $4,750 $1,020 $357 $306 $255 $255 Net Cost (Employer s Contributions less Tax) Savings) Totals $6,450 $2,193 $4,257 SEP Employer/ Employee Salary Employee Deferrals 9 Employer s Contributions 10 Total Contributions Employer s Tax Savings 8 Bill Charlie Doug Evan Frank $100,000 $35,000 $30, $8,750 $7,500 $6,250 $6,250 $8,750 $7,500 $6,250 $6,250 $8,500 $2,975 $2,550 $2,125 $2,125 Net Cost (Employer s Contributions less Tax) Savings) Totals $53,750 $18,275 $35, (k) Employer/ Employee Salary Employee Deferrals 11 Employer s Contributions 13 Total Contributions Employer s Tax Savings 8 Bill Charlie Doug Evan Frank $100,000 $35,000 $30,000 $18,000 $5,500 $4,500 $4,000 $4,000 $8,750 $7,500 $6,250 $6,250 $43,000 $14,250 $12,000 $10,250 $10,250 $8,500 $2,975 $2,550 $2,125 $2,125 Net Cost (Employer s Contributions less Tax) Savings)) Totals $53,750 $18,275 $35,475 7 Employees may contribute up to $12,500 in 2017 not including catch up contributions. 8 Assumes a C Corporation with a 34% marginal tax rate. 9 Employees do not contribute to a SEP plan. 10 Assumes Bill s business contributes 25% of compensation. 11 Employees may contribute up to $18,000 in 2017 not including catch up contributions. 12 Assumes Bill s business matches employee elective contributions dollar-for-dollar up to an amount not exceeding 3% of the employee s compensation. 13 Assumes Bill s business contributes up to deductible amount of 25% of compensation. Overall employer/employee contribution must be the lesser of 100% compensation or $54,000. 8

11 Non-qualified plans. When qualified plans do not provide enough retirement benefits to key employees including the owner a non-qualified plan can fill the gap. In most cases, your company will receive no current tax deduction. Under a non-qualified plan, you don t have to meet the non-discrimination requirements imposed on qualified plans. This means you have the flexibility to offer a non-qualified plan to just the key employees you wish to reward. You can tailor individual plans to meet the needs of your key people and your own specific goals. For example, to encourage key employees to stay with your company longer, you can impose longer vesting periods than allowed under qualified plans. Advantages for employees include: n Deferral of income taxes n No statutory contribution limits n Survivor benefits for family n Enhanced retirement income Disadvantages include: n No ability to rollover into an IRA or other qualified plan once distributions are made n Plan cannot be directly funded. If the plan is funded it could cause benefits to be immediately taxable n Any informal funding is subject to the claims of creditors of the company 9

12 A comparison of selected non-qualified plans: Plan Type Strategic goal Does the plan offer income deferral? Who owns the assets? DEFERRED COMPENSATION PLAN NON- QUALIFIED Provides a way for employers to reward their key employees by helping highly compensated executives find a non-qualified way to defer pre-tax income as well as help provide supplemental income for retirement Yes. Executive defers a percentage of taxable salary or bonus Employer DEFERRED COMPENSATION WITH ENDORSEMENT SPLIT DOLLAR NON-QUALIFIED A non-qualified deferred compensation plan which also provides income tax free death benefit to employee s beneficiaries through an endorsement Yes. Same as traditional deferred compensation plan The value of endorsed death benefit is taxable to the employee as compensation Employer, which names itself beneficiary for amount of premiums paid Beneficiary for remaining death benefit determined by employee EXECUTIVE BONUS PLAN Provides a way for employers to help highly paid executives fund life insurance in a costeffective manner and provide them with another option to help meet financial goals or cash value accumulation No, however, inside build-up in life insurance policy grows tax deferred Executive, who can name spouse or other beneficiaries RESTRICTIVE EXECUTIVE BONUS ARRANGEMENT Adds to the traditional executive plan incentives that are intended to encourage employees to remain with an employer, i.e. restrict access to the cash value of life insurance for a stated period (golden handcuffs) No, however, inside build-up in life policy grows tax deferred Executive, who can name spouse or other beneficiaries The employer can restrict access to the policy s cash value as well as the ability to transfer the policy without employer consent until a set date(s) Note: Deferred compensation benefit is typically paid by employer with the policy cash values. Please note that these guidelines are for educational and comparative purposes only and are not meant to serve as financial or tax planning advice. See your tax advisor for guidance on choosing the retirement plan that best fits your needs. 10

13 How are plans obligations funded? How are funds distributed at death? Benefits to Employer Benefits to Executive Employer uses deferred compensation to purchase assets that may be used to fund obligations Beneficiaries specified in deferred compensation agreement receive either taxable annual income or taxable lump sum death benefit, depending on plan design If plan includes life insurance policies they will provide income tax-free death benefit and accumulate tax-deferred cash value for the employer. (Premium payments are not tax deductible) 14 Minimal ERISA requirements Helps recruit, retain, and reward key employees Income tax deduction for benefits payment Has additional deferral opportunities not subject to qualified plan limits and penalties Can supplement retirement income Employer can begin distribution of deferred compensation at specified date (generally at termination of employment) Income is not taxed until distributed Can help with financial planning objectives Employer pays premiums for life insurance Employer receives amount specified in agreement (usually amount of premiums paid or cash value) Remaining amount to employee s beneficiaries, income tax free, as specified in endorsement agreement Same as traditional deferred compensation plan Same as traditional deferred compensation plan as well as death benefit By the employer The employee incurs taxable income to the extent of the premium amount (can be a double bonus to offset additional tax liability) Named beneficiaries receive insurance death benefit generally free from income tax Distinguishes its compensation package Provides select executives with death benefit and potential cash value accumulation Income tax deduction generally allowed for bonus payments Minimal plan setup costs Flexibility to include select group of employees Accumulates tax-deferred life insurance policy cash value Provides death benefit to beneficiaries generally free from income tax Allows for cash value accumulation which may be distributed through withdrawals and/or loans 15 Is not subject to qualified plan limits Executive retains policy when leaving employment By the employer The employee incurs taxable income to the extent of the premium amount (can be a double bonus to offset additional tax liability) Named beneficiaries receive insurance death benefit generally free from income tax Same as traditional executive bonus plan Promotes employee retention by attaching strings to the benefit Accumulates tax-deferred life insurance policy cash value Provides death benefit to beneficiaries generally free from income tax Allows for cash value accumulation which may be distributed through withdrawals and/or loans 15 Is not subject to qualified plan limits Executive retains policy when leaving employment after vesting requirements are met 14 The Pension Protection Act of 2006 limits the death proceeds an employer can exclude from income when the proceeds are not fully applied to purchase the interest of the deceased business owner. The Act also imposes specific requirements that the employer notifies the individual about the insurance, secure his/her written consent and submit annual reports to the IRS. Death benefits and tax-deferred cash accumulation may be subject to the corporate Alternative Minimum Tax (AMT). 15 Partial withdrawals and surrenders from life policies are generally taxed as ordinary income to the extent the withdrawal exceeds your investment in the contract, which is also called the basis. In some situations, partial withdrawals during the first 15 policy years may result in taxable income prior to recovery of the investment in the contract. Loans are generally not taxable if taken from a life insurance policy that is not a modified endowment contract. However, when cash values are used to repay a loan, the transaction is treated like a withdrawal and taxed accordingly. If a policy is a modified endowment contract, loans are treated as a taxable distribution to the extent of policy gain. On a MEC, loans, withdrawals and surrenders are treated first as distributions of the policy gain subject to ordinary income taxation, and may be subject to an additional 10% federal tax penalty if made prior to age 59½. Loans, if not repaid, and withdrawals reduce the contract s death benefit and cash value. 11

14 Allstate can help you offer attractive retirement options to your employees. For more information on how Allstate can help meet the retirement needs of your employees, call your Allstate agency today. Together we can help identify potential solutions for you, your employees, and your business. 12

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16 This information is provided for general consumer educational purposes and is not intended to provide legal, tax or investment advice. Life insurance offered through Allstate Life Ins. Co. & Allstate Assurance Co., 3075 Sanders Rd, Northbrook IL 60062; American Heritage Life Ins. Co., 1776 American Heritage Life Dr., Jacksonville FL In New York, life insurance offered through Allstate Life Insurance Company of New York, Hauppauge NY. Securities offered by Personal Financial Representatives through Allstate Financial Services, LLC (LSA Securities in LA and PA). Registered Broker-Dealer. Member FINRA, SIPC. Main Office: 2920 South 84th Street, Lincoln, NE (877) Check the background of this firm on FINRA s BrokerCheck website To learn more, call your Allstate Agent or Personal Financial Representative, or visit us at allstate.com Allstate Insurance Company allstate.com ALR165 3/17