What is a Mega Backdoor Roth 401k

What is a Mega Backdoor Roth 401k

Maybe you’ve heard of a mega backdoor Roth 401k already.  But, how do you navigate creating one as an employer with employees?  Read below as we answer the question, what is a mega backdoor Roth 401k, and how to navigate it as an employer.

Saving for retirement is complicated, and the most common vehicle is a traditional 401(k). However, these plans result in the tax being deferred until retirement.

Because of this, some people prefer a Roth IRA or Roth 401(k), where you put the money in after paying tax on it. The distributions are then tax free. A tax advisor will generally tell you which option is going to work best.

There are also various ways to combine these options in an advantageous way. One of these is the mega backdoor Roth, which allows people with a good amount of savings to add a lot of money to their Roth IRA quickly.

What is a Mega Backdoor Roth 401k?

First of all, let’s talk quickly about what a backdoor Roth is. In order to have a Roth IRA, you have to have income below certain levels. In 2021, those levels are $140,000 for a single person or $208,000 for a couple filing jointly. If your income is above that limit, you can’t contribute to a Roth IRA.

What you can do is create a traditional IRA, put your money in it, then convert it to a Roth IRA. You will have to pay taxes on any gains the money made while in the IRA and repay the tax deduction. Ideally, what you do is put the money into the traditional IRA then immediately transfer it to the Roth.

So, a mega backdoor Roth is…doing this on a larger scale. It’s what you do when you have maxed out your contributes to both your 401(k) and your Roth IRA. First of all, your 401(k) plan has to allow after-tax contributions and let you move that money to a Roth IRA.

Not all employer plans do this, and employers should be ready to potentially be approached about this by their highest earners.

What you do is put in the maximum post-tax contribution, which is typically $58,000 in 2021. This is after your and your employer’s normal contributions. I.e., you put in all your after-tax savings and then immediately transfer those to the Roth IRA (or roll them into a Roth 401(k)) before they start making money.

You can also roll the contributions into a Roth IRA and the investment earnings into a traditional IRA. Yes, the IRS says this is okay. What the IRS doesn’t like is you rolling only after-tax amounts over. You have to also move across an equal amount of the pre-tax amount…although you can move it right back.

This is an option for you and your highly compensated employees, but there are some things to think about.

what is a mega backdoor roth 401k

Who Benefits from a Mega Backdoor Roth 401k?

The mega backdoor Roth is an option for high earners who are able to save substantial amounts of money. Typically, you can move up to $38,500 into a Roth IRA this way. As it’s advantageous to max everything out first, you can see that this is the kind of thing available to C-suite executives and other high rollers.

You should also talk to your tax advisor first, as it may not be the most advantageous use of that money. It may, for example, be a poor strategy to do this when you have debt you could pay off. Most advisors suggest also maxing out your HSA if you have one, as well as your kid’s saving accounts. Bear in mind that you do not get an immediate tax benefit from doing this.

Basically, this is a great way to increase your retirement savings, but is not something you should do until you have taken care of your other key financial goals. Always talk to a tax advisor before deciding between this and other potential options such as taxable investment accounts or a Roth 401(k).

Is the Mega Backdoor Roth 401k Going Away?

Quite possibly. Congress sees this as a loophole that allows higher earning individuals to avoid paying taxes. It’s also seen as something that is done only by the ultra-wealthy.

Because of this, the House Ways and Means Committee is proposing prohibiting all employee after-tax contributions in qualified plans and converting after-tax IRA contributions to Roth. This would affect people below the $400,000 level below which Biden promised not to raise taxes, so it’s possible it won’t happen or will be offset by other changes to the tax code.

If you happen to have the kind of savings that would warrant using the mega backdoor Roth this year, you should absolutely consider doing so as it may be gone by the end of 2022.

It would also close the regular backdoor Roth IRA, denying people who have gone above the income level the ability to continue to contribute to a Roth IRA.

    What Should Employers Think About?

    If you have high earning employees, they might want to take advantage of the mega backdoor Roth. For them to do so, your plan has to be set up to allow both after-tax contributions and in-service withdrawals.

    Also, it is actually beneficial for people using this loophole for you not to match contributions. However, you can’t treat people at different income levels differently when contributing to plans, so in order to help them out with this you would have to impact your lower-salaried employees as well. Thus, it’s something to be careful of; you can’t lower the CEOs contributions so they can use the mega backdoor without potentially getting into trouble with the IRS.

    However, allowing after-tax contribution on its own can prevent the plan from passing the non-discrimination test. That is to say, it allows highly compensated employees to contribute more than the IRS limits, which is why many employees don’t allow this.

    Allowing it just so that your highly compensated employees can take advantage of a loophole breaks not just the letter but likely also the spirit of this.

    The mega backdoor Roth is something that some business owners can take advantage of, but you have to be very careful to avoid breaking IRS rules on retirement accounts. 

    For employers, it is a strategy that carries some IRS risk from allowing after-tax contributions or potentially treating highly compensated employees favorably. Finally, there is a very real chance this strategy is going away. Some people may want to take advantage of it this year ahead of potential legislation.

    If you need help finding which plan makes sense for your company, schedule a plan discussion with us or take 30 seconds to find which plan is best for your company with The Retirement Plan Evaluator.

    What Is An HCE And How Does It Affect Your 401k Plan?

    What Is An HCE And How Does It Affect Your 401k Plan?

    Many employers offer 401k plans to their employees for varying reasons. However, the major incentive for starting one is the plan’s tax deferral benefits, which allow high contribution limits.

    The current contribution limit for 2021 reaches up to $19,500 for employees under the age of 50, which was the same for 2020. The total contribution limit, including employer contributions, increased from $57,000 in 2020 to $58,000 in 2021. In addition, employees over age 50 and above can bump up their savings through a catch-up contribution with a limit of $6,500, which is unchanged from 2020. 

    401k plans can be beneficial for employees in growing their retirement savings, especially if the employer is generous with the matching contributions. By March 31, 2021, 401(k) plans had assets valued at approximately $6.9 trillion in assets and made up almost one-fifth of America’s retirement market worth $35.4 trillion.

    But, there are existing rules which limit plan contributions. Employers have to be aware of how to manage their plans and especially when they have highly compensated employees on their payroll.

    The Internal Revenue Service (IRS) clearly defines what an HCE is and outlines the provisions of non-discriminating tests which employers must take every year. Compliance is required of employers and their employees to avoid facing IRS penalties.

    What is an hce

    What Is an HCE?

    A Highly Compensated Employee (HCE) has to meet two criteria according to the IRS. The first rule is that they have over 5% ownership in the company providing the plan at any time in the current year or previous year. The second rule is that their earnings amounted to $130,000 or more from the firm if the previous year was 2020 or 2021. And also, if they were in the top 20% of the rank in compensation, if the employer chooses.

    The set conditions for an HCE are a part of the non-discrimination test which the IRS requires all 401k plans to undertake annually. The test divides 401 k contributors into two; non-highly compensated employees and highly compensated employees to ensure equal benefits for all employees in the company.

    Employers pass the test if the average contributions of HCEs do not exceed 2% of the average contributions of non-highly compensated employees (NHCE). Previously, there were no limits on the contributions by highly compensated employees, meaning their contributions could be higher, equally earning them higher tax benefits.

    It is important to note that just 5% ownership does not translate to being an HCE, but it starts from a 5.01% share. In addition, spouses can combine their shareholding to meet the threshold provided they work in the same company. The shares of the employees’ children and grandchildren working in the same company also count.

    For clarity, compensation referred to in the second criterion includes basic salary, bonuses, overtime, commissions, among others, including 401k plans.

      Why It’s Important

      The purpose of the non-discrimination test is to ensure all employees receive equal benefits. This acts as a move to inspire any HR professional working in an organization where the ratio of top executives to employees is unbalanced. This means even low-earning employees have an equal chance to grow their retirement plans. Passing the nondiscrimination test is especially important for a company with HCEs or they risk facing penalties from the IRS and other administrative challenges.

      There are three main tests to determine if a plan is discriminating:

      1. Actual Deferral Percentage (ADP)

      This test makes a comparison of the average deferral rates (Pretax and Roth deferrals) of both highly compensated and non-highly compensated employees. ADP is a percentage of the employee’s compensation deferred to the 401k plan. A plan passes the test if the average deferral of the HCE does not exceed 125% of the average deferral of a NHCE. Alternatively, it passes the test if the HCE deferral rate is not more than the lesser of 200% of the average deferral rate of an NHCE or the average deferral rate of the NHCE plus 2%.

      2. Actual Contribution Percentage (ACP)

      It applies similar tests as ADP but compares the average employee contributions of both HCEs and NHCEs.

      3. Top Heavy Test

      This targets key employees, and compares their assets with all the assets under the plan. The plan fails the test if the value of assets in the accounts of key employees exceeds the value of total assets in the plan by 60%.

      The general rule for a nondiscriminatory plan is that HCEs or top employees do not access more benefits from the plan, and that a good number of non-HCEs participate in the plan.

      What is an hce

      What to Do If the Plan Fails the Test

      There should be no worry if the plan fails the test as there are corrective actions to take. At the minimum, any excess contributions will be refunded to the employee losing out on the tax deduction. However, the excess contribution from the previous year will be reimbursed to the HCE as taxable income in the current year.

      Second, the employer can boost the minimum contribution rates of non-HCEs to meet the minimum rates by making non-elective employer contributions. The top-heavy test fail can be corrected through non-key employees receiving a contribution of up to 3% of compensation from the employer.

      The IRS 401k Plan Fix-it Guide offers more details on how to rectify ACP and ADP test failure.

      Ways to Minimize the Damage

      Employers can bypass the HCE rule by taking some steps:

      1. One solution is for the employee to continue making nondeductible contributions to the 401k plan. However, they will be trading off on accessing tax deductions.
      2. Another solution is to consider saving money in a taxable account. The employee will not have any limits to their retirement savings even if they are an HCE. They can manage their investment income as they see fit.
      3. There is also making catch-up contributions if the employee is 50 years or older. If the employee is 50 years or older, they can raise a $6,500 catch-up contribution in 2020 up to $26,000, and this amount extends to 2021.
      4. Opening a Health Savings Account (HSA) will allow employees to grow tax-deferred savings. This is useful as it will help cover their healthcare costs in the future. Participants save significantly on medical costs because they can withdraw money from an HSA without any tax deductions.

      How Does It Affect Your 401k Plan?

      Having an HCE in a 401k plan means foregoing some retirement savings and tax breaks. In addition, employers tend to fail the nondiscrimination test conducted every year largely due to its complexity.

      So, employers have to manage their 401k plans to ensure the contributions of HCEs do not exceed the contributions of non-HCEs by more than 2%.

      Failure to take action will lead to the plan no longer claiming tax-qualified status, and all contributions will have to be redistributed to the participants in the plan. In principle, HCEs might feel constrained in maximizing their retirement contributions.

      Why You Might Want To Consider a Safe Harbor 401k

      One downside of non-discriminating tests is locking out mostly small to medium-sized companies from passing them. When compared to larger businesses, they have a disproportionate number of HCEs compared to non-HCEs. So, with more HCEs on the payroll going through the test, it is challenging as the contributions of non-HCEs have to be higher.  

      A safe harbor 401k plan allows employers to find a way around the annual tests. With this plan, an employer is required to contribute to their employees’ retirement accounts in three ways.

      The first is the nonelective contribution of 3% made by the employer to every employee, including those not making contributions. The second way is to match 100% of the employees’ contributions on the first 3% of their compensation, and 50% on the next 2% of their compensation. The third option is for a company to match 100% of employees’ contributions with up to 4% of their compensation, but not exceeding a 6% limit.

      Integrating a safe harbor 401k means an HCE can max out their contributions, and employers do not have to deal with non-discriminating tests. It is important to note that the plan also has the same deferral limits as other 401ks, which are up to $19,500 per year for employees under 50 years, and a catch-up contribution limit of $26,000 for employees over age 50 or older.


      Providing a 401k plan is a solid step towards ensuring a bright retirement future for your employees.

      Being a highly compensated employee as stipulated by the IRS can place a significant constraint on maxing out retirement savings. Fortunately, there are ways to counter this, such as opening an HSA account or taking advantage of the catch-up provision.

      For employers, they have the option of adopting a safe harbor 401k plan which is exempted from the complex non-discrimination tests and limit on contributions.

      The bottom line is, for any employer to have a highly motivated workforce, they need to effectively manage retirement plans for both highly compensated and non-highly compensated employees.

      If you need help finding which plan makes sense for your company, schedule a plan discussion with us or take 30 seconds to find which plan is best for your company with The Retirement Plan Evaluator.

      Should ESG Investments Be Included In A 401k?

      Should ESG Investments Be Included In A 401k?

      The topic of adding ESG investments inside of a 401k plans has been a popular topic as of late.

      On March 10, 2021, the U.S. Department of Labor announced its endorsement of two rules which had been on hold under the Trump administration. The first rule that will not be administered by EBSA is restricting investors from relying on Environmental, Social, and Governance (ESG) criteria to evaluate the majority of retirement investing that could potentially lock out some ESG investments. The second rule being put off is not allowing voting for ESG criteria.

      Despite the U.S. Government’s efforts to push ESG investing and more investors joining the bandwagon, it is slowly catching on mainly due to political and regulatory factors. From this outlook, the Biden administration is encouraging employers and employees to invest ESG funds in 401k plans.

      As a consequence, it is also prompting companies to care more about climate change and other issues to draw in more investors who care about such values. As retirement plans consider ESG funds, it is important to understand what they are all about.

      What Is an ESG Fund?

      It is a kind of portfolio constituting bonds and equities which incorporates environmental, social, and governance factors.

      For an organization or company to engage in ESG investing, they are evaluated by potential investors on environmental, social, and governance standards.  How does the company manage environmental issues such as conservation, animal testing, and the use of energy? Does the firm have a value system for how it relates to its stakeholders and the surrounding community? And, how does it deal with corporate governance issues, transparency, and accountability in their financial reporting, participation of stakeholders, and voting rights?

      Before an investor chooses to work with any company, they need to be assured of their values.

      ESG, however, is not a new phenomenon, as it caught on in the mid-2000s when it was highlighted during the 2006 United Nation’s Principles for Responsible Investment (PRI ) report. The idea was to use ESG as a metric for measuring the financial performance of firms to grow sustainable investments.

      How ESG Funds Work

      They apply both passive and active investing. Active ESG funds involve investors actively engaging companies to improve their ESG practices. They choose funds that fit their set criteria. As for passive ESG funds, companies rely on index providers such as MSCI. The indexes point out the companies with high-level ESG scores.

      Types of ESG Investments

      These are the leading options:

      1. Environmental ESG investments: These are available to firms promoting renewable energy resources.
      2. Social ESG investments: It is limited to companies that have a good reputation for upholding labor and human rights.
      3. Corporate governance ESG investments: Every investment is evaluated under corporate governance standards.

      Why Are They Becoming More Popular?

      According to the American Retirement Association, a survey revealed that 72 % of Americans were considering ESG funds. This means firms and organizations have to start streamlining their operations and culture to apply the growing trend of sustainability investing. A company is now more than a profit-making machine but one that creates a positive impact on its partners, employees, the environment, and the community.

      In 2020, there was an upsurge in ESG funds accounting for $51.1 billion from investors, double the previous year. Last year was a pivoting period for the whole of America dealing with significant social justice and environmental issues. In particular, investors were and are still keen on matters of climate change and racial and gender equality and put their money in institutions that applied ESG standards.

      Overall, two reasons sum up why ESG funds are being taken up by more investors:

      1. They promote common good 

      They focus on the commitment of a company to vital issues such as the environment and social justice. Companies are now rating themselves on how much they can impact communities by giving back. This draws in the majority of people, especially when matching values. Its main attractive quality is doing well while making profits.

      2. They generate large ROIs    

      ESG funds tend to perform well because the leadership performs according to its corporate governance rules, which safeguard the interest of investors. Even with the pandemic ravaging investments, ESG funds have outperformed most in the market.

        Is It a Good Idea to Add to Your Lineup?

        There has been a positive reception by employers towards the adoption of ESG options. However, the uptake is still very slow. But why is this? Before considering integrating ESG into a 401k plan, there are a few considerations.

        Similar to the management of 401k plans, ESG funds have regulations that make investors shy off. Previously, President Trump had set up rules preventing 401k plans from including ESG funds. So far, only 3% of plans offer ESG funds for investing, according to the Plan Sponsor Council of America. Even though the current government waylaid these rules, 401k fiduciaries want a stable legal foundation to include these funds.

        Another concern among employers is potential lawsuits by employees adding to the bag of other 401k lawsuits. Adding ESG options to the 401k plan will demand the plan advisors ensure the good performance of investments. Employers have to stay on top of effective asset allocation and diversification.

        On the other hand, ESG 401ks promise exponential performance for an organization. More and more investors want to link their portfolios to sustainable investing.  A good example of successful companies that have ESG funds in their retirement plans is Google Inc. and Amazon Inc. This is evident it can work. As more investors are getting into the trend, it is likely more employees will want to invest if these funds are included in their 401k plan. As time progresses, it may require more awareness and education of employees on ESG funds, which is initiated by the plan sponsors.


        While there is a growing interest in channeling money into ESG funds, 401k plans are still lagging. It is expected for employers to be overly cautious about providing ESG fund options to employees due to the regulatory environment and risk of being sued.

        Even as advisors and administrators of the plan caution employers, more employees are showing interest in ESG 401k funds. Deciding if ESG funds are right for your company depends on how you can circumvent the barriers to their adoption, and if you can structure your 401k plan to adopt and set them up for success.

        If you need help finding which plan makes sense for your company, schedule a plan discussion with us or take 30 seconds to find which plan is best for your company with The Retirement Plan Evaluator.

        Employer Tax Benefits of a 401k

        Employer Tax Benefits of a 401k

        The 401k plan is among the most popular employer-sponsored retirement benefits plans in the United States. Data indicates that there were approximately 600,000 401k plans in 2020, with about 60 million active contributors.  In this article, we’ll discuss employer tax benefits of a 401k plan.

        While the majority of employees are eligible to participate in a 401k plan, many employers are still hesitant to offer it. According to a 2020 J.P. Morgan survey, less than 50% of employers offer a retirement savings plan. Out of those who do not offer an employer-sponsored retirement savings plan, 63% said that they had no future plans of offering a 401k match program. 

        Costs of a 401k

        The most cited factor that impedes employers from offering a 401k or any other employee-sponsored retirement savings plan is the perception of cost. Generally, there are three basic costs of a 401k, which include the start up costs, administration costs, and the matching costs. 

        The majority of the costs tend to be associated with the match.  However, many hesitate to even look into a 401k because of the perceived costs of the 401k.

        Some of these costs can be offset with tax breaks.

        employer tax benefits of a 401k

        Employer Tax Benefits of a 401k:  The SECURE Act

        Although sponsoring the 401k plan may seem too complex and cost-prohibitive for employers to consider, those who offer it clearly see the benefits, not just for their employees, but for their businesses as well. 

        Since the Setting Every Community Up for Retirement Enhancement (SECURE) Act was signed into law in 2019, employers have more than one reason to jump on board with this highly valued benefit offering.

        In case you’re wondering what the SECURE Act is, it is a legislation that changes retirement plan design, administration, and compliance requirements. 

        Among the provisions to persuade employers to offer the 401k plan, the SECURE act guarantees several benefits, including:

        1. Tax Credits of Plan Startup Costs

        The SECURE Act makes setting up a 401k plan more affordable for employers, especially those running small businesses. Employers may be able to claim a tax credit up to $5,000 to cater for setting up the plan.  Employers are entitled to the tax credit for the first three years of the plan.

        To qualify for the retirement startup costs tax credit, a small business must have 100 or fewer employees who receive at least $5,000 in compensation in the previous year. The small business must also have at least one 401k plan participant who’s not a non-highly compensated employee. 

        2. Tax Credits of Administration Costs

        After setting up a 401k plan, an employer incurs administrative costs of maintaining the plan. The day-to-day operation of a 401k plan involves costs for basic and essential administrative services, like plan recordkeeping, accounting, trustee, and legal services. 

        With the SECURE Act in place, small business employers who meet eligibility requirements can claim tax credits of administrative costs. The tax credit is available to cover 50% of the administrative costs of implementing the 401k plan.

          3. Tax Benefits of Contributions

          One of the frequently asked questions about retirement plans is: are 401k contributions tax deductible for employer? The answer is yes. Since 401k plan contributions reduce an employer’s taxable income, employers can deduct contributions on the company’s federal income tax return to the point that the contributions don’t go beyond certain limitations. 

          The taxes for the year should be reduced by the contribution amount multiplied by the marginal tax rate, as per the employer’s tax bracket. The more income, and thus the tax bracket, the more the tax savings from contributing to the 401k plan. 

          4. Tax Credits of Establishing Automatic Enrollment Plans

          In addition to the tax credit for startup costs, the SECURE Act proposed a new tax credit known as the Small Employer Automatic Enrollment Tax Credit. Eligible employers that add an automatic-enrollment feature to their retirement plan can claim a tax credit of $500 per year for a three-year taxable period, starting with the first taxable year the employer adds the auto-enrollment feature. 

          Like other tax credits, the Small Employer Automatic Enrollment Tax Credit is pretty much for small businesses for a very small action. The automatic enrolment tax credit is also available to small business employers that convert an existing retirement plan to an automatic enrollment design.


          employer tax benefits of a 401k

          mployer Non-Tax Benefits of a 401k

          In addition to the above tax benefits of a 401k, employers get to enjoy other benefits. For instance, offering a 401k helps with employee acquisition, boosts employee satisfaction and increases employee retention.

          According to research by PR Newswire, four in five employees prefer new or additional employee benefits or perks to more money in their pay check, citing that benefits provide better experiences and increase satisfaction. Defined contribution plans, such as the 401k are ranked among the top benefits that employees would prefer over a pay rise.  

          Get Professional Help in Implementing 401k Employer Tax Benefits 

          The overall goal of the SECURE Act is to simplify the 401k implementation process and offer benefits to employees. Nevertheless, it doesn’t necessarily mean that employers should try to tackle setting up a 401k plan without some form of guidance.

          Would you like to enjoy the employer tax benefits of a 401k plan but don’t know where to start? 

          Life, Inc. Retirement Services can help. We are a 401k provider dedicated to simplifying the 401k implementation process to make it as seamless and easy for employers. 

          Whether you’re a startup, solo entrepreneur, corporation, or financial advisor, we will offer a customized solution that is right for your business.


          If you need help finding which plan makes sense for your company, schedule a plan discussion with us or take 30 seconds to find which plan is best for your company with The Retirement Plan Evaluator.

          Simple IRA vs. 401k | The Pitfalls of a Simple IRA

          Simple IRA vs. 401k | The Pitfalls of a Simple IRA

          Choosing between a Simple IRA vs. a 401k can be overwhelming. After all, the plan that you choose will determine the trajectory of your small business going forward.

          Among other things, your decision for a retirement plan will determine your:

          • Own retirement prospects
          • Employees retirement prospects
          • Employee retention and turnover rates
          • The desirability of your business to talent

          When faced with this dilemma, many small business owners have a natural inclination to choose a Simple IRA. Well, why not? It requires fewer documents, is easy to implement, and even has “simple” in its name.

          However, there’s more to retirement plans than meets the eye, and this blog will help demystify the Simple IRA plan by comparing and contrasting it to its peer, the 401(k).

          simple ira vs. 401k

          Simple IRA vs. 401k

          Both the Simple IRA and 401(k) are retirement funds.  With a retirement fund, your employees contribute a percentage of their salaries called an elective deferral, which is then invested into a long-term retirement fund.

          Both the 401(k) and the Simple IRA allow the employer to participate by making contributions to the employee’s retirement funds.

          The similarities don’t end here. The Simple IRA and the 401(k) share the same tax benefits, which are:

          • Contributions are exempt from income taxes
          • The growth/ capital gains in your retirement funds are exempt from taxes
          • The government only taxes your funds at withdrawal 

          Simple IRA

          A Simple IRA is an acronym for Savings Investment Match Plan for Employees. Its name gives it away as one of the easiest paths to a retirement plan for your employees.

          The government designed Simple IRAs with small businesses in mind. That said, to benefit from this plan, your business should have 100 or fewer employees. As an employer in a Simple IRA, your contributions are either:

          • A non-elective contribution of at least 2% of the remuneration for all employees earning above $5,000
          • A matching contribution of 100% of the first 3% of an employees contribution

          Some of the benefits of using a Simple IRA for your business include:

          • Easy to set up and deploy
          • Relatively inexpensive
          • Has a low maintenance burden


          A traditional 401(k) is another popular retirement plan that your small business can offer your employees in place of a Simple IRA.

          By choosing this retirement plan, your business sacrifices simplicity for flexibility, more options, and customization.

          Any business, regardless of its size, can join the 401(k) retirement plan and start building the future of its employees.


          What Makes A 401(k) Better Than A Simple IRA

          Your decision will eventually come down to the unique circumstances of your business and your preferences as an employer.

           However, there are several pitfalls that should make a Simple IRA a less desirable option, even for a small business. 

          These pitfalls include:

          Lower Contribution Limits

          By choosing a Simple IRA over a 401(k), you automatically forgo the higher contribution limits that comes with the latter.

          A Simple IRA limits your contribution in three ways:

          • You get a yearly maximum of $13,500 which is $6,000 less than you would get in a 401(k) plan
          • Both you and your employees above 50 get a maximum of $16, 500 which is $9, 500 short of what you would get in a 401(k)
          • Your catch-up contributions at $3,000, are half what a 401(k) offers.

          With an average rate of 8% a year, a small difference of $ 6,000 each year will result in a massive $180,000 difference in 3 decades.

          Lack Of A Profit-sharing Option

          By opting for a Simple IRA, you miss out on the profit-sharing option a 401(k) offers. This option allows your business to write off taxes on the matching contributions you make to your employee’s retirement accounts.

          Moreover, it allows you to make more generous contributions to yourself or, better yet, performing employees as a motivation.

          Lack Of Flexibility In Contribution

          A Simple IRA gives you little room when it comes to matching your employee’s contribution. First, unlike a 401(k), it is mandatory that you match your employee’s contribution.

          In a 401(k), however, you get to choose whether you want to match your employee’s contribution. Moreover, you have the freedom of matching from 0-25% of your employee’s contribution.

           If that’s not enough, you don’t have to match your contributions dollar-for-dollar as you have to in a Simple IRA.


          How To Grow The Family Business


          Not only does a Simple IRA mandate that you make contributions, but it also makes 100% of all contributions you make vested.

          Vesting means that your employee can withdraw your contributions at any time without needing prior permission.

          A non-vested retirement fund like a 401(k), on the other hand, comes with its fair share of benefits. For example, by mandating that your employees can’t withdraw your matching contributions until the 2nd year, you can retain employees and reduce turnover.

          Less Control Over Who Joins

          In a Simple IRA, you have extremely limited control over the employees who can enroll in your firm’s retirement plan.

          The law strictly mandates that all employees who have earned $5,000 in any two prior years and are expected to earn the same in the current year should be in your Simple IRA.

          In a 401(k), however, you have more control over who joins. The employees who join your 401(k) must be:

          • 21 years old and above
          • Have more than a year’s experience

          The Loan Option

          A Simple IRA plan significantly inconveniences you or your employees early or premature access to your retirement savings. It has no loan option and fines all early withdrawals at 25%.

          However, with a 401(k), your employees can tap into their retirement savings during emergencies through a loan.

          No Roth Option

          The most significant deal-breaker for Simple IRA accounts is the lack of a Roth Option. Like you saw above, retirement plans are exempt from taxes right until the point of withdrawal.

          Well, the Roth Option offers a way around this eventual tax. With this in your 401(k) plan, your employees make after-tax contributions to a Roth account, and then have their eventual withdrawal tax free.

          Every business, just as every retirement plan, is unique.  When determining a Simple IRA vs. a 401k, you’ll need to take all aspects into consideration.

          Taking the time to do research on which retirement plan is key to a successful benefits program and environment for your employees.


          If you need help finding which plan makes sense for your company, schedule a plan discussion with us or take 30 seconds to find which plan is best for your company with The Retirement Plan Evaluator.

          The “New” Work Environment: How to Attract Employees After COVID-19

          The “New” Work Environment: How to Attract Employees After COVID-19

          No one outside the scientific community may have seen the coming of the COVID-19 pandemic. But come it did, and with it came significant shifts in various aspects of our life, including changes in the labor market. 

          The last thing that employers would have thought of when working on their 2020 human resource strategy is that a pandemic would emerge and force them into laying off or furloughing employees. As such, most employers were caught off guard. Many of them were forced to reduce their employee pool to remain afloat. 

          However, things are starting to look up again. Movement restrictions have been lifted in many places. Businesses have begun seeing an upward trend in their productivity and require more employees to uphold this trend.

          But the pandemic has changed the workforce dynamics. Candidate experience is now radically different. Employers looking to attract top talent post-Covid need to ensure that what they are offering is in line with people’s needs. Incentives such as coffee and pool tables that were game-changers previously will no longer cut the chase.  Below are some pointers on how to attract the best employees after COVID-19.

          Offering hyper-competitive pay and benefits

          Let’s be honest; nobody fancies working in a place where they are paid peanuts. If you want to get the best employees, you must be willing to offer them attractive salaries and other benefits such as bonuses. 

          Recently, it seems like many businesses are adopting this tact even as they recover from the effects of COVID-19. For instance, Chipotle just raised its average hourly wage rate to $15. McDonald’s has also given its employees a raise. Employees working in restaurants owned by this burger chain will also have their salaries increased by 10%. 

          Offering employees hyper-competitive pay and benefits such as medical insurance and bonuses seems to be the way to go. You will not only be able to attract the best employees, but you’ll also retain your best employees. 

          Flexibility: Allowing employees to work virtually or in-person

          According to the Lead Data Journalist of YouGov, Matthew Smith, 57% of people who were working before the pandemic began and intend to continue being a part of the workforce say they prefer working from home even when the crisis is over. 

          This underscores the fact that virtual work is here to stay past the COVID-19 period. More people are advocating for either part-time or full-time remote working via social media platforms such as LinkedIn. 

          However, despite the increasing popularity of remote work, there are those employees who can’t wait to be back in the office. If you want to get yourself the best talent, you should be flexible to allow both virtual and in-person workers when the world regains some normalcy.

          Creating stability in the workplace

          Would you rather work in a stable or an unstable workplace environment? Most people would choose the former, and rightly so. A stable workplace ensures that employees can perform their tasks efficiently. As a consequence, their productivity increases. 

          Employers should demonstrate stability in two ways 

          Firstly, when looking to attract new employees to your firm, ensure that you showcase the stability of your business. Given the rate at which many employers have closed their doors in the last two years, it is understandable that jobseekers may be wary of the longevity of the firms they want to work with.  Be sure to demonstrate the dominance you have in your industry and that you have a sound vision for the foreseeable future. 

          Secondly, show those employees wanting to join your business that their job is secure. With the unemployment rates off the roof, the fear of a department downsizing or a business being dissolved is very real. Ensure that you give employees a sense of their jobs being available in the long term. Show the potential employees that this isn’t a quick short-term job but rather a career they can grow in. 

          Be Transparent 

          According to Tiny Pulse, transparency is the main factor that contributes to employee happiness. Whether someone is unemployed or leaving their current position to join your firm, these individuals put a lot of trust in you. 

          It is only fair that their trust is rewarded with complete transparency on your part. Don’t sugarcoat your business position. For instance, if you’ve faced some bottlenecks, you should be upfront with the potential candidates so that they know what they are getting into. Being honest will go a long way to uphold the reputation of your business. 

          Add a social place to your office setting 

          You can set a social place where employees can socialize. The post-Covid working environment will have some aspects of guidance, policies, and signposting. Create clear symbols and signs to show places that are out of bounds. For instance, you can mark places where people shouldn’t sit. 

          Apart from the social place having games, it can also have magazines, newspapers, and other reading materials to help with social work conversations, more so materials that are specific to a certain industry. 

          Think about your employees’ future

          Another way of attracting and retaining the best employees post-Covid is by thinking about their future. There are many ways you can do this. For starters, you can periodically offer them training opportunities to help them become more skilled. But more importantly, you should think of their future past their employment period. You can accomplish this by developing an employer-sponsored retirement plan for them. Ensure that your employees actively participate in these retirement contributions. 

          Make it known to them the benefits that they can accrue from these plans, such as reducing taxable income, growth of deferred tax, and getting “free” money at the end of their employment period. If you develop a lucrative employer-sponsored retirement plan, you are guaranteed to get the best employees because they know that you care about their future. 

          Your business is important to you. Your employees are equally important to you. Having happy employees will ensure that the productivity of your business increases. Use our Retirement Plan Evaluator to learn which retirement plan is best for your business and employees. 

          If you need help finding which plan makes sense for your company, schedule a plan discussion with us or take 30 seconds to find which plan is best for your company with The Retirement Plan Evaluator.