Maximizing Retirement Benefits as a Business Owner

 

How TPAs Help Business Owners

As a business owner, you understand the importance of offering retirement benefits to attract and retain top talent. However, you also want to ensure your company’s retirement plan is structured in a way that allows you to maximize the tax-advantaged contributions for yourself and key employees. 

Many businesses settle for generic, one-size-fits-all retirement plan designs that fail to take full advantage of opportunities within existing regulations. They end up overpaying for employee contributions at the expense of the owners’ benefit. An expert TPA (third-party administrator) can review your plan and potentially restructure it to be significantly more cost-effective while still providing competitive benefits to staff.

 

Optimizing Retirement Plans

The truth is, there are numerous provisions and choices involved when drafting retirement plan legal documents. And depending on how these options are selected, the ultimate allocation of contributions can vary tremendously between business owners and employees. Seasoned TPAs deeply understand these nuances and know how to optimize plan designs accordingly.

Ex: a common scenario is a business owner wanting to allocate 25% of their compensation into a profit sharing retirement account. With an improperly structured 401(k), the company may be required to contribute the same 25% of compensation for all employees. This likely isn’t desirable or fiscally viable for the owner.

However, an experienced TPA can construct the plan documents to allow the 25% contribution allocation for the owner while only requiring a 5% contribution for staff based on regulations around cross-testing of benefits. Simple choices like this in plan provisions make a substantial difference.

 

Finding the Compensation Sweet Spot

Similarly, TPAs can adjust items like vesting schedules, compensation definitions used for allocations, and employer contribution formulas to further favor owners over rank-and-file personnel. All while staying within the guardrails of ERISA, the IRS tax code, and Department of Labor regulations.

The goal is to structure everything allowable to hit the “sweet spot” of providing enough contributions to pass annual compliance testing, while driving 75-95% of total contributions towards owners and key employees. A skilled TPA knows exactly how to legally accomplish this through skilled plan design.

 

Maximizing Business Owner Benefits

The alternative companies often face is paying far more than necessary towards staff retirement accounts just to achieve the desired contribution allocation for owners. As Serena Morse cites, some profit-sharing formulas require $50,000 in staff contributions just to allocate $70,000 for the owner’s benefit. A TPA redesign can correct this drastically, allowing the same $70,000 allocation to the owner with only $20,000 going to employees.

Another common situation TPAs rectify is companies utilizing a SEP IRA when they have W-2 employees on staff beyond just owners. With a SEP, owners are required to provide the same percentage contribution to all employees, regardless of their compensation level. So if an owner contributes 25% towards themselves, they must contribute 25% of salary for every single employee as well.

An experienced TPA would consult with the owner and shift them into a properly designed 401(k) profit sharing plan. This allows flexibility to contribute just the minimum required for staff (e.g. 5%) while maximizing the allocation for owners based on their goals and cash flow situation.

 

Key Takeaway

At the end of the day, business owners should leverage third-party retirement plan administrators who specialize in creative plan designs that meet compliance standards while optimizing outcomes for the company’s specific circumstances and priorities. With expert-level knowledge of regulations and strategic benefit allocation methods, the most skilled TPAs become invaluable partners in maximizing retirement contribution opportunities.

To learn more about how a TPA can maximize your benefits from employee retirement plans, check out the latest episode of the Progressive Agency Podcast.