401(k) Plans for Small Business Owners
The 401(k) plan is a popular type of employer-sponsored retirement plan available to business owners with employees. Through a 401(k), employees make pre-tax contributions to the plan and those contributions are then invested at the employee's direction into investment options available through the plan's investment menu. 401(k) plans offer flexible employer funding and allow employers and employees to maximize their retirement savings.
FEATURES High contribution limits1 - Employer contributions up to 25% of compensation on salaries up to $245,000
- Individual salary-deferral contributions of up to $16,500
- Individual catch-up contributions of up to $5,500 if age 50 or older2
- Combined total contributions of up to 100% of compensation, not to exceed $49,000 or $54,500 with catch-up contributions
Current tax savings - Tax-deductible employer contributions
- Tax-deferral of individual contributions and any earnings3
- Salary-deferral contributions not included in determining employer tax deduction limits
Flexibility - Employer contributions can be structured as discretionary
- Employer determines eligibility requirements for plan participation4
- Wide range of investment options
- Can be used in conjunction with another tax-qualified retirement plan, such as a defined benefit plan
- Participants can roll over account balances to another qualified plan or IRA upon separation from service (subject to plan rules)
- Ability to offer loans and/or hardship withdrawals
- Ability to implement vesting schedules for employer contributions
- Individual 401(k) plan solution available for self-employed business owners with no employees other than a spouse
Compliance requirements - Annual nondiscrimination testing and top-heavy testing
- May be subject to IRS Form 5500 filing
BENEFITS - Flexible plan design to accommodate retirement planning objectives of business and participants
- Tax-deferred compounding and growth potential
- Automatic payroll deductions make contributing easy and help participants save for retirement
- Wide range of investment options
- Competitive solution to attract and retain employees
PLATFORM SOLUTIONS Merrill Lynch Wealth Management offers various platform solutions to support your 401(k) plan that provide flexibility in investment options and plan administration. Advisor AllianceTM - Combines Merrill Lynch investment and advisory services — led by your Merrill Lynch Financial Advisor — with a choice of diverse, committed partners to provide competitive recordkeeping and plan administration services for your business retirement plan needs
RCMA® Investment Only - Offers the brokerage services of Merrill Lynch to employers who want to retain existing relationships with their third-party administrator (TPA) for recordkeeping, administrative, tax-reporting and trustee arrangements
RCMA Investment Link® - Offers automated trading and clearing of mutual fund transactions and the administrative services of regional TPAs authorized to trade through Investment Link
PLAN DESIGN CONSIDERATIONS 401(k) plan design features can help you meet your retirement planning objectives. Safe Harbor - Requires employer match contributions and immediate vesting of employer contributions
- Automatically satisfies certain nondiscrimination testing, including average deferral percentage (ADP) and actual contribution percentage (ACP) if safe harbor guidelines are met
- Fewer restrictions on salary-deferral contributions for higher compensated employees
New Comparability - Employer contributions are discretionary and are calculated using a formula based on estimates of lifetime benefits
- Maximizes contributions for owners and key employees without increasing overall plan costs
- Allows key employees the potential to build retirement savings more quickly
Auto Programs Incorporating auto programs into your plan may help employees, such as those who otherwise might not choose to join or fully participate in the plan, invest in their futures. Auto programs are flexible and can be tailored to meet the needs of your company and your employees. - Auto enrollment helps employees meet their retirement goals by enrolling them in the plan as soon as they are eligible
- Auto deferral increase is an easy solution to help participants contribute more and increase savings rates
- Auto investment helps ensure participant contributions are reasonably invested when the participant does not actively select an investment option5
Qualified Automatic Contribution Arrangement (QACA) - Combines the benefits of safe harbor and auto enrollment/auto increase into a 401(k) plan
- Offers lower employer match contribution than safe harbor alone
- Automatically satisfies ADP and ACP testing
- Eliminates contribution restrictions for key employees
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HOW DO I GET STARTED? If you are interested in establishing a 401(k) plan, your Financial Advisor can guide you through the process of identifying which Merrill Lynch solutions fit your unique needs by 1) working with you to choose a plan administrator to provide the necessary administrative and recordkeeping services, 2) helping you select investment solutions and 3) opening your account.Your Financial Advisor is committed to understanding your specific needs and can help you develop customized strategies that meet the retirement planning objectives of you and your employees. |
1 Contribution limits apply for 2010 and 2009. Amounts for subsequent years may vary.
2 Tax legislation provides a catch-up provision for employees age 50 and older in the current year, giving them the ability to potentially make up for missed savings opportunities.
3 Taxes due upon withdrawal. You may also be subject to a 10% tax penalty if you take a withdrawal prior to age 59½.
4 Age-based exclusions can't exceed 21 years of age, service based exclusions can't exceed one year of service or two years for fully vested employer contributions.
5 Auto investments are required for plans using auto enrollment.
Any information presented about tax considerations affecting client financial transactions or arrangements is not intended as tax advice and should not be relied on to avoid any tax penalties. Neither Merrill Lynch nor its Financial Advisors provide tax, accounting or legal advice. Clients should review any planned financial transactions or arrangements that may have tax, accounting or legal implications with their personal professional advisors.