401(k), Simple, Oregon Saves: What type of retirement plan is best for my business?

Oregon employers are no strangers to being REQUIRED to set up an auto IRA savings program through Oregon Saves if they do not already offer a company retirement plan. Soon, perhaps, employers all over the country will receive similar notices. There is proposed legislation in Congress currently that will establish a national requirement for employers with over 5 employees to offer a plan. Many in the industry are expecting some variation of this to pass.

Currently, if you have 5 or more employees in Oregon, your “deadline” for Oregon Saves has passed. Practically, however, it is not too late to set up an alternative plan. There are some options you might want to consider before you commit to a government mandated program.

1-Oregon Saves

Let’s start with the mandated program. The Oregon Saves program is essentially a Roth IRA with required automatic payroll deduction. You deduct a percentage of your employee’s paycheck after tax and send it to Oregon Saves. You will need to coordinate with your payroll provider to provide the information you need to transmit to Oregon Saves with each payroll contribution.  Oregon Saves decides which investment options will be offered in the program, and where the money will be held.

The standard savings rate for Oregon saves is 5% with auto escalation of 1% per year up to 10% of pay. Since Oregon Saves is a Roth IRA, employees are subject to the Roth RIA contribution limits set by the IRS each year. For 2021, the limit is $6,000 per year ($7,000 if age 50 or older), assuming you earn at least $6,000 in wages. Income limits also apply, for example a single filer who makes over $140,000, will not be eligible to contribute.

Bottom line: Affordable option. The downsides are that it is very DIY and if you are a business owner who is hoping to benefit from Oregon Saves, yourself, it might not a good option as you can set up a Roth IRA and receive the same benefit. Also, as mentioned, income limits apply which could be limiting for owners and higher compensated employees.

2-Simple Plan

A Simple Plan can be an IRA or 401(k). What is simple is that these plans don’t require discrimination testing (including top heavy), a vesting schedule, or a Form 5500 at year end. The limits are higher than the Roth IRA ($13,500 in 2021) and employees who are age 50 and over can make an extra $3,000 catch up. Your plan must have fewer than 100 employees, however, and if you reach 100 employees, you’ll have to terminate the plan within two years of surpassing the limit.

Alas, there are a few not so simple things about Simples. One, you can’t sponsor a 401(k) plan and a Simple at the same time and the tricky part is that you can only cancel a Simple plan once per year as of January 1. Written notice needs to be provided to employees 60 days prior (by November 2).  This means if you have a Simple plan and you want or need to change to another type of plan, you will need to time the change very carefully.  Additionally, Simple accounts cannot be rolled over into another plan without a significant penalty unless the account has been open for at least 2 years. This means there could be some coordination and follow up after termination if you have newer employees.

A Simple 401(k) is very similar to a Simple IRA, with key differences including a compensation cap for employer contributions and the availability of a loan provision in the Simple 401(k), but not in the IRA version.

Bottom line: With the expanded options available for small 401(k) plans, Simple’s are less attractive these days, especially given the numerous restrictions. Also, note that employer contributions are REQUIRED for a Simple so, even though you may not need compliance testing or extensive administration, the cost savings may not be enough to offset the limitations.

3-401(k) Plan

Most would agree the 401(k) plan is the gold standard. A 401(k) offers ultimate flexibility but also more complexity and usually higher administrative costs. With a traditional 401(k) plan salary deferrals can be up to $19,500 annually ($26,000 if you are age 50 or over). Note, that the plans are subject to discrimination testing so if you are not able to commit a certain minimum employer contribution on behalf of your employees, you may not be able to take full advantage of the plan as an employer.

That said, plan design options are extensive, especially with flexibility provided by the SECURE Act of 2019, and you can design a plan specifically to meet the needs of you, your business, and employees. For some ideas and examples of plan design opportunities, you can download our Business Owner’s Guide to Plan Design here.

Potential employees see 401(k) plans as a must and most employers find that questions about their 401(k) match are at the top of every prospective employee’s list of questions. Plans these days are not only tools for saving; the best plans also provide additional financial wellness tools and support for your employees, many whom access financial education primarily through the company retirement plan providers. (You can read more about our Financial Wellness & Coaching programs here.)

Bottom line: A 401(k) plan is the optimal long-term solution for most employers. With its recruiting and retention value for employees and flexibility it provides for business owners to maximize their own tax-advantaged savings, you can design a program that works for best for you. Additionally, the Secure Act also provides for tax credits for employers who set up a new plan (and haven’t offered a different plan in the past 2 years). Reach out if you would like more details on how the tax credit could help you.

There are other options out there for small employers including Solo(k)s and SEPs.  If you’d like a free consult to help determine what plan is right for your company, you can sign up here.

Retire WELL!