Tutorial of Tax-Sheltered Savings Plans for 2014

By elitecpas | May 27, 2014 |

Some of the most powerful planning tools are the tax-sheltered savings plans available to almost every business. But these tools won’t help you if you don’t know how they work.

We’ve published an executive summary for you below. If you’d like to pay less tax and increase your retirement fund, review the chart below. We can assist in properly setting up any plan you need.

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Feature	Profit-sharing	401(k)	SIMPLE IRA	SEP
Restrictions on adopting?	Generally, none.	Generally, none.	Limited to employers with 100 or fewer employees earning at least $5,000 in previous year.	Generally, none.
Can employer maintain other qualified plans?	Yes.	Yes.	No.	Yes, unless Form 5305-SEP is used to adopt the plan.
Minimum age/service requirement?	Age 21, up to two years service may be imposed.	Age 21. No more than one year of service may be required for employee deferrals.	All employees earning at least $5,000 in any two prior years and expected to receive at least $5,000 in current year must be covered.	Age 21, any service in last three out of five years, and compensation of $550 or more in current year.
Vesting?	Graduated or cliff vesting allowed if eligibility is one year. 100% immediate vesting after two years if eligibility is more than one year.	For employer contributions; same as profit sharing. Employee contributions are 100% vested.	100% immediate vesting.	100% immediate vesting.
Annual employer contributions required?	No.Discretionary, unless set forth in plan or required by the top-heavy rules.	Same as profit-sharing plan.	Yes, but can limit to matching contributions.	Same as profit-sharing plan.
Limit on deduction of employer contributions?	Maximum 25% of all eligible employees’ compensation.	Generally, same as profit-sharing plan. Elective deferrals do not count toward deduction limit.	100% match of deferrals up to 3% of compensation or 2% nonelective contribution (maximum $5,200 for nonelective match).	Same as profit-sharing plan.
Limit on compensation?	$260,000 for 2014.	Same as profit-sharing plan.	Compensation cap of $260,000 only for employer 2% nonelective contribution.	Same as profit-sharing plan.
Employee deferrals allowed?	No.	Yes. Employee deferrals limited to $17,500; $23,000 if age 50 or over.	Yes. Employee deferrals limited to lesser of 100% of compensation or $12,000; $14,500 if age 50 or over.	Only under SARSEPs (adopted prior to 1997) limited to $17,500; $23,000 if age 50 or over.^a
Individual employee deferral limit?	N/A	$17,500 under IRC Sec. 402(g).	$12,000 under IRC Sec. 408(p).	Same as 401(k) under a SARSEP (adopted prior to 1997).
Annual addition limit of IRC Sec. 415 apply?	Yes. 100% of compensation, up to $52,000 per participant.	Yes, same as profit-sharing plan.	No. However, there is an effective limit of $12,000 (for 2014), plus the employer match or contribution.	Yes, same as profit-sharing plan.
Top-heavy rules apply?	Yes.	Yes.	No.	Yes.
Nondiscrimination rules apply?	Yes.	Yes. Special rules apply to employee deferrals.	No.	No.
Catch-up contributions allowed?	N/A	Yes.$5,500 for 2014.	Yes.$2,500 for 2014.	Yes.$5,500 under SARSEPs (adopted prior to 1997).
Permitted disparity allowed?	Yes.	Yes.	No.	Yes, but only with nonmodel SEP.
Minimum coverage rules apply?	Yes.	Yes.	No, but all eligible employees must be allowed to participate.	No, but all eligible employees must be allowed to participate.
Participant loans allowed?	Yes, if specified in plan document. Subject to IRS limitations.	Yes, same as profit-sharing plan.	No.	No.
Rollovers to other plans allowed?	Yes, to another eligible retirement plan.	Yes, same as profit-sharing plan.	Yes, to SIMPLE IRAs or, after two years, to eligible retirement plan.	Yes, to eligible retirement plan.
Annual report (Form 5500) required?	Yes, unless one-participant/$250,000 exception is met.^b	Yes, same as profit-sharing plan.	No.	Generally no, unless the plan fails to meet the filing exception for SEPs.
Deadline for adopting plan?	By year-end.	Non-safe harbor plan: by year end. However, must be before any employees defer compensation (i.e., only future compensation may be deferred).Safe harbor plan: Existing 401(k) plan—by December 1. Profit-sharing plan without a 401(k) feature—no later than October 1.	Between January 1 and October 1. If previous SIMPLE IRA plan maintained, new plan can only be effective on January 1. New employers coming into existence must establish as soon as administratively feasible and can be effective between October 1 and December 31.	By the extendedduedate of the tax return for that year.
Deadline for making plan contributions?	Employer’s tax return duedate, including extensions.	Salary deferrals: as soon as reasonably segregated.Employer contributions: by tax return duedate, including extensions.	Salary deferrals: as soon as reasonably segregated.Employer contributions: by tax return duedate, including extensions.	By the extendedduedate of the tax return for that year.

Posted in For Business and tagged 401, 401(k), ira, SEP