Transcript

Voiceover: [00:00:00] Welcome to Retirement Unlocked with Larry Heller. Your Life Your Way, unlimited possibilities. Join us as we explore how tailored financial planning and investments can help you navigate life transitions with confidence. Let’s dive into this week’s episode. 

Matt Halloran: Welcome back to Retirement Unlocked with Larry Heller.

Today we’re diving into a common question from business owners. Should I offer a simple IRA or a 401k to my employees, and which one is better for me as an owner? Retirement plans can be a powerful tool, not just for saving on taxes, but also for planning for your own future and attracting and retaining a.

Top talent, but picking the right one can feel overwhelming. So we’re gonna dive into that today. So Larry, welcome to the show. Ah, thanks Matt. 

Larry Heller: Glad to be here. Excited to talk about the 4 0 1 Ks and simple and retirement plans today. 

Matt Halloran: Alright, brother. So, so here’s the thing. What, what are they, let’s do some operational definitions and then more importantly is why do [00:01:00] companies or businesses choose one over the other?

Larry Heller: Right? So you, you hit the nail right on the head and, and you, your went. At the top of the show when you talked about the reasons why. So a lot of business owners, you know, they’re starting out and they want to have a retirement plan in place. So they’re cost conscious, so they’re looking at the easiest way to do it, the least expensive way of doing it, but sometimes.

Because of attracting and retaining employees that doing that could actually be the most expensive because you’re not getting the right talent or talent is leaving ’cause you don’t have the right plan in place because employees look at this. So you don’t wanna just consider the actual dollar cost, you gotta consider the big picture.

And I think a lot of business owners don’t, don’t do that. I, I had a conversation with a, a law firm. Oh, about a year or two back about the reasons why I will go into the reasons why I, I just felt that a 401k one was so [00:02:00] much better for them in so many different ways, and their answer was, well, it’s gonna cost me more money.

And I’m like, yeah, well, out of pocket, it’s gonna cost you more money, but it’s not the right plan for you personally, and it’s not the right plan. For your employees. So in the long run, you’ll save more money and you’ll make more money by having better employees. So sometimes it’s a hard concept for, uh, business owners to grab.

Now there are a lot of different reasons why putting a simple plan makes sense, um, and depends upon the business, depends upon what you’re trying to do and where the cash flow is. I get that, but. Knowing the differences here and making that right decision is, is extremely important. And a lot of people don’t know.

I had a conversation with a business owner last week, and he really, he has, he has a simple plan and he was like, why should I do this, the 401k plan? And I started talking to him about it and it [00:03:00] just wasn’t registering. They, they can’t get past the fact that it’s not really, really simple, like a simple plan is.

Okay, well you just let us into, let’s dive into what is the simple plan. Okay. So some of the key features of Simple Plan is, like I said, it’s easy and in inexpensive to set up. Now there are limited plan options in there and employees can contribute through their. Payroll deduction. Uh, so depending upon the actual plan that you are using, fees could be higher or lower, but, but they are lower than a traditional 401k plan.

Um, and then employers are required to contribute in one of two ways. They can either do a. Dollar for dollar match up to 3%, or they can do what’s called the non-elective contribution. Just give all the employees 2%. So it’s really simple to put the plan in place, select a few funds, um, change your payroll to do either the [00:04:00] non-elective contribution or the match.

And voila, you have a simple plan. 

Matt Halloran: Alright, Larry, so there were the key features of really what a simple is. So let, let’s break down this whole idea of pros versus cons so that the business owners can make an informed decision. 

Larry Heller: Yeah, so the first thing is it’s, it’s really simple to administer. There is no annual IRS filings for the employer.

Therefore, they don’t have to hire what’s called A-T-P-A-A third party administrator. So that’s one. Um, there’s really lower setup or almost no setup and very little maintenance costs about putting a plan in place. And it’s real easy. The employees just make their, you know, a salary deferrals and how much they want to do.

And a plan is, plan is set up. So those are the pros. The cons is there’s lower contribution limits compared to a 401k. Um, so the, for a simple plan, the max is $16,000, and if you’re over 35, if you’re over 50, you can do [00:05:00] another 3,500 catch catch up, and we’ll, we’ll talk about the comparisons of a 401k in a little bit, but the limits are lower.

So if you wanna put more weight to your, into your plan, then a simple plan may not be the. The best way of doing it. One of the other big cons is there’s limited flexibility in employer contributions. So a lot of plans that we have in place, they have a 401k plan, but then they also can add what’s called a profit sharing plan on top of that.

And by doing that, they can now make it a lot more flexible and I’ll do a lot more things that you can’t do if you are a simple plan. So if you want to. You know, have a great year and you wanna do some profit sharing plans and you wanna do some other things, and we’ll get into the reasons why you wanna do this in a few minutes.

You can’t do that in a simple plan. And the other thing is, no loans are allowed. Oh. So, which is a key factor for many employees because a, a, a lot people, when [00:06:00] they go into these plans, they’re like, well, when can I get my money? Well, I can’t, you can’t get your money without penalty till you’re 59 and a half.

Well, man, I’m 25 years old. What happens if I need some money beforehand? Well, sorry. You can’t get your money outta this. You can’t borrow against any of it. You’re kind of stuck. So a lot of employees won’t participate in this and therefore aren’t, aren’t happy about it, uh, because they can’t, um, they can’t get any other money out for a long, long time.

Matt Halloran: Okay. I’m, I’m just gonna ask like a question. I’m, as a business owner, might be knocking around, where did they come up with the number? 16,000 plus 35 catch up? You know what that 

Larry Heller: congress comes up with? These is numbers that they think they contribution is. And then every year they look at it and they say, should there be a cost of living adjustment?

But your guess is as good as mine. Where they come up with these, where they come up with these numbers 

Matt Halloran: just seems really arbitrary, especially when we’re diving [00:07:00] now into the 401k, which is exponentially more money that people can go ahead and put in. Okay, so now you just define what the simple is. Let’s talk about what is a 401k.

Larry Heller: Okay, so a 401k plan. It’s just the code that’s in the IRS, which allows you to do, um, pre-tax, uh, contributions to, you know, from your, from your salary. So it, it’s similar to a simple plan, but there are different other key features in here. So it’s available to. You know, any business size, a simple plan is, is actually limited to under a hundred employees.

But so, but here it’s available to any business size. Um, it allows for both traditional pre-tax and, um, and Roth after tax contributions. Um, there’s an optional employee match. Um. Uh, and you can also add a profit sharing plan to this. And like I said before, simple plans can’t do loans. A 401k plan [00:08:00] can do loans.

There are limits. You can usually only borrow 50% and it’s up to $50,000, but you’re allowed to do that. Um, on the flip side, there is required annual IRS. Possibly filings and compliance tax compliance testing. Um, you can get around some of the compliance testing by using a Safe Harbor plan, but you do have to file a 5,500 or 5,500 Easy forum, um, each year.

So there is some filing that needs to be done, and usually you do need A-A-A-T-P-A to be an actuary to, to do that for you. 

Matt Halloran: Okay. Have we talked about Safe Harbor plans before? 

Larry Heller: Oh yeah, we, we’ve done, we’ve done 401k plans and safe harbors. It may not have been a while, but we’ve definitely, we’ve definitely done it.

But, um, um, but I’m guessing you’re asking kind of what is a, what is a safe harbor plan? I mean, might as well. Okay, so let’s talk about what, what, what is a safe harbor plan? So the, the IRS and [00:09:00] Congress allows you to do a retirement plan, but they don’t want this retirement plan to be skewed to the high earners.

I believe that’s anyone that’s making more than $160,000. So when you put a plan in place, if you don’t do a safe harbor, you have to do what’s called testing. And in these testing, there’s a couple different tests. The lower earned people can’t put in a percentage more, um, uh, less than the higher earns.

So if you have a retirement plan in place and all your, your, your highly. Compensated employees making over 160. They participate and none of your lower employees participate and the plan is going to fail testing. And we’ve seen that happen. And you don’t even know about this until after the year is, and then you have to knock on all these employees who, um, made over 160,000 and say, by the way.

Here’s the money back that you, [00:10:00] you contributed to your 401k. You weren’t allowed to do that. Wow. And they’re not happy. Um, they end up having to pay more taxes. So in ways to avoid that is to do what’s called a safe harbor plan. So a safe harbor plan now allows you, you still have to do the testing, believe it or not.

I don’t know why, but even if you fail the testing, if you do a safe harbor plan and you could do one of two ways in a safe harbor plan, you don’t have to worry about giving any money back. So there are two different types of safe harbor plans, okay? One is a non-elective whereby before in the simple, I talked about a 2% non-elective.

Here it’s a 3% non-elective. So if you give all your employees 3% contribution to your 401k plan, you pass the safe harbor. Don’t have to worry about the testing. The other way of doing it is doing a match. So if you do a match, now you have to match a hundred percent of the first 3%. And then 50% of the next [00:11:00] 2%.

So if an employee puts away 5%, you are gonna match 4%. But if an employee doesn’t put away anything, you’re not matching anything. So, so you may have to give more if the, all your employees contribute five, and you may have to only do three if you do the non-elective. So a lot of times we’ll have these conversations.

We’ll look at the. Census and have these conversa. Somebody said, well, my employees aren’t going to, A lot of ’em unfortunately are not going to match. So we’re doing a match. It doesn’t cost the owner as much. Um, some owners are like, I really want to give all my employees 3%, so I’m gonna do the non-elective, and I.

They feel that’s a benefit. So having those kind of conversations upfront with a business owner, either an existing plan or a new plan to see what is the right thing for that company and for that, um, client is, is super important. But getting back to your answer of what a safe harbor plan [00:12:00] is, if you do one of those two things, you don’t have to, you worry about a non highly compensated.

Person having to take money back out of the plan during that year. Gotcha. 

Matt Halloran: And, and please, if, if you haven’t listened to other episodes where we’re talking about business planning and 4 0 1 Ks and IRAs and Roths and all of those things, please make sure that you go back and listen to the other, uh, podcasts that Larry and I have done, uh, over the years, because lots of great information there.

Okay, so now we’re gonna talk about, you just talked about the key features of the 401k. Let’s talk about the pros and cons. 

Larry Heller: So again, higher contribution limits. Um, in 2025, you can put away $23,000. If you’re over 50, you can put away 7,500 and, um, if you’re 61, 2, and three, you can put away even more money.

You can listen to one of our podcasts and we talk about the super catch up for that. So that’s one of the advantages that you could do, um, in a 401k plan. Um, so. [00:13:00] Employers can contribute additional amounts. So if they want to do a profit sharing plan, they can actually contribute up to 69,000 per employee.

So there’s a lot of different ways. And when you do this profit sharing plans, one of the things that you mentioned, um, attraction and retention. Here’s where it gets really interesting because you can now do on the profit sharing part, you can do vesting. And what is vesting? ’cause that’s probably your next question to me, Matt.

So vesting is how long you have to be there to actually, you vest in this, uh, amount and you actually can get it if you leave. So you can vest sometimes you can uh, uh, uh, they can have short term investing. Sometimes you can do it over six years where it’s 0, 20, 40, 60, 80, a hundred. Mm-hmm. So now. You’re giving employees money in this profit sharing plan, but if they leave before they’re there six years, they’re gonna forfeit some of that money.

And when they’ve been there six years, if they go start somewhere else, they may [00:14:00] have to start all over again. Mm-hmm. So it’s another. Kind of a way of retaining and attracting, saying there is money here. And the longer I stay, the bigger pot of money I can get. So an extremely, extremely important pro for a 401k plan, um, depending upon the company that you’re, um, the plan trying to put in place, 

Matt Halloran: that’s humongous.

What, what a wonderful way to really hold onto those key top employees and make them feel like they’re. Part owners of the company. Mm-hmm. By offering that sort of vesting schedule. Alright. Any other, uh, pros to the playground? Yeah, 

Larry Heller: again, we, I mentioned you, you could do a, um, you can also, uh, have the loan features in, in here as, as well.

And there’s a couple different ways of doing profit sharings and putting, um, putting things in, you know, putting things in place. Um, there are other plans that you can add on top of that. We’re not gonna get into that. We’ve done some. Shows on cash balance plans. So there are other things that you can do.[00:15:00] 

Cool. Alright. Cons. What are the drawbacks to the 401k Cons? So they’re more expensive to setup and maintain, but there is, the government wants new companies. To put plans in place. So they are giving credits. So a lot of times now, the first few years, you can offset almost all your costs. It depends upon your employee breakdown, um, the, the size, how much they’re earning.

But we, we just put a plan in place. It’s actually costing them nothing the first two years because they’re getting, um, um, credits on their, on their tax returns. Uh, but. Um, ongoing. After that, it is more expensive than a simple plan. Um, like I mentioned before, there is some manual IRS filings possible compliance testing.

So there is, you do need to have an actuary, so there’s obviously some more cost with a, uh, with a TPA. Um, and then a lot of times, not only do you wanna use a [00:16:00] TPA, but you are using a third party administra, uh, a record keeper mm-hmm. On top of the TPA, so the money is housed there. So there’s a few, there are a few fees in there.

Now, those fees can be either picked up by the employer passed on to the employee. Or a split between them. So it’s a lot of different ways of doing this. So even though there’s more fees, there’s a lot of different ways of doing that. And like I said, if you don’t have a plan in place and you haven’t had one, you can take advantage of, of the credits that the IRS is offering you 

Matt Halloran: now, can you switch?

So can you start with a simple and then transfer it into a 401k or vice versa? 

Larry Heller: You can. There are certain deadlines when you have to get out of a simple, in order to get the 401k plan in place for the next year. ’cause you can’t have both in the same year. Um, I don’t recall exactly what the deadline is, but yes.

So if you are thinking about switching, you want to speak to [00:17:00] someone early on to make sure you have enough time to get out of a simple and get into a, into a 401k. I haven’t had anyone want to go the other way, so I’m not sure what the rules are for that. 

Matt Halloran: Well, but here’s the best part, uh, for those of you who haven’t.

Figured this out by now, you can just, you can call the office at Heller Wealth Management. They’ll be able to answer these questions for you. Alright, so, uh, how do we make the decision on which is gonna be best for our business? Okay, 

Larry Heller: so one of the things that we talked about with a, with a simple, you know, you’re really just starting out.

You want to have some plan in place there, but cash flow is really not. Super, uh, on an ongoing basis, you’re not, not really sure what it’s gonna be on an ongoing basis, but you wanna have something in there. You’re young enough, so you’d like to max out the higher amount, the 23, but at least if you’re putting away something, it’s okay.

And you’re fine with some of the, the, the limited flexibility. So when I say is a simple plan is better than no plan. Yeah, [00:18:00] so, so if you want to do something like that, that’s when a business is better to do a simple plan. When you start to get a little bit the next level where you see you’re a little bit better cash flow analysis.

You can afford some of these. Um, you see the plan growing. You wanna attract and retain key employees. You want to provide them with the loan options. You may want to add a profit sharing plan into place. You’re starting to think about putting more money away from yourself. So those are the time times that you want to think about, you know, either changing from a simple to a 401k or just starting with a 401k plan.

That’s right. Um, and like I said, e everyone’s different and it’s not, there’s no right or wrong answer here. It’s what you think is gonna work best for yourself and what’s gonna work best for not only your company, but your employees as well. 

Matt Halloran: Alright. What, what 

Larry Heller: should I have asked you that I didn’t? So, um.[00:19:00] 

So we talked a little bit, you know, a little bit about the safe harbors and what that is and how that’s going. And the max. So, you know, the, uh, uh, the key thing to me here that people don’t, um, keep in mind, like I said at the top of the show, is, is the employee retention. Um, and what is that going to be as far as that?

And not just the, the costs of the outlay of that. And like I said, a lot of, a lot of times now, a new plan, you can offset that by a lot of credits. But even if you have an existing simple and you’re thinking about going to an 401k plan, um, and you’re not eligible for the credits, what, spending a little bit more money to.

Get a key employee or keep a key employee is just so valuable. Yeah. And it’s so, so many times overlooked by the business owner. I remember, oh, must have been years ago. Um, it was a elevator repair company. [00:20:00] Um, and we did a whole proposal. They, they had a 401k plan, but it wasn’t designed properly. And we, we met with the CFO who wanted to do something better for the.

Employees, and it wasn’t that much more money to change the plan over from one to the other. Um, and the CFO said, look, great, let’s do it. Just have to run it by the, the owner. We remember the owner, the owner said, nah, you know, they, it’s not gonna make them any better. I’m just gonna keep the 401k in, in, in place.

No foresight to. Wow. Really see what would happen with his employees and how much, a little bit more money would make them feel so much better and probably be more productive. Something you can’t, you, you, you can’t always see, but happy employees. More productive. Yeah. Um, so that, to me, those type of variables, those.

Non-financial variables when you’re a business owner and trying to grow is so important [00:21:00] and how having the right retirement plan in place can have a major impact. Yeah. So that, that’s what I would take from this. And when we’re gonna drop, we’ll drop the side by side comparison and the notes between the, the plans.

But if you really think, if you’re thinking of having. Uh, putting a new plan or you have it simple and you wanna move to someone else, um, you know, you know, please feel free to give us a call. We’ll do a whole analysis for you. We’ll ask you all those questions. And even if you just have a 401k plan, you may not have the right 401k plan.

So, uh, so that’s another thing. That’s a whole nother podcast that we can talk about. Matt, 

Matt Halloran: well just put it on the list, brother. Uh, we have a heck of a long list. So, alright, well thank you for turning into retirement Unlocked. If you found this episode helpful, please make sure that you like, subscribe. And more importantly, if you know a business owner or you are an employee of a business and you really wanna have these conversations, make sure you share this podcast with them.

And if you wanna take the next step in the episode description below, you’re gonna find a link to Heller Wealth Management, where you can, uh, find a lot more resources and the option to schedule a [00:22:00] free, uh, complimentary 20 minute call with their team. Please make sure you take care of that or take advantage of that and.

Here’s the thing, your ideal retirement starts with a conversation. Let’s get started. We’ll see you next time on Retirement Unlocked.