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May 2, 2013
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IRA rollover a win-win for employer, employees


Bill and Erin from San Jose own a successful cookie business with 20 talented and loyal employees. They called us with a quandary. For years they have been paying what they felt were exorbitant fees for the administration of their “Profit Sharing/401(k)” plan, a plan they set up to help their employees (and them) save tax-deferred dollars and augment Social Security upon their retirements. Bill and Erin were already frustrated by “Top Heavy Rules,” which severely limited them to contributing because of the low contribution rates of their employees. But when combined fees exceeded $3,000 a year, their accountant suggested they give us a call to evaluate alternative plans to continue tax deferral, enable Bill and Erin to contribute more for themselves and still motivate the employees to save toward retirement.

After review of several retirement plans, we suggested the following:

1. Have each of the employees “roll over” their current portions of the profit-sharing/401(k) plans into their own “Rollover IRA’s”, thus continuing tax-deferral. Note: The temptation for employees to cash in the money was avoided when they were reminded, but for a few exceptions, that taking monies from a retirement plan prior to age 59.5 years would result in a severe penalty of 10 percent to the Feds, 2.5 percent to the state and additionally the entire amount would be immediately taxable. This could easily result in a loss of 40 percent of that employee’s hard earned dollars! All of the employees agreed it would be wise to “rollover” tax-deferred. Once the monies were transferred to the employees’ Rollover IRA’s, they could invest according to their individual wishes.

2. Establish a new SIMPLE IRA (“Savings Investment Match Employees”) for the company. With the SIMPLE IRA participants are 100 percent vested whenever the employer deposits contributions into the employees’ accounts. Each year the employer is required to make a contribution to the employees’ (note: Bill and Erin are employees as well) whether it be in the form of a match, or what’s called a non-elected contribution. Matching contributions means that Bill and Erin have to match what the employees contribute either a) up to 3 percent every three out of five years for each participating employee (two out of five years minimum 1 percent a year), or b) 2 percent every year for every eligible employee. Bill and Erin thought this was a great motivator, and noted that 3 percent is the most the employer has to match, which could be considerably different from a 401(k).

3. Bill and Erin and their employees control their own investments in a SIMPLE IRA. Participants can contribute up to $12,000 a year. Those over age 50 may add an additional catch-up of $2,500 a year. Now, these business owners were getting excited, knowing their employees from the previous profit sharing/401(k) plans could rollover while deferring taxes, could continue making pre-tax contributions to their own SIMPLE IRA accounts, and Bill and Erin could even contribute on their own without those previous limiting “top-heavy rules” of the profit sharing/401(k) plan.

4. It got better! While Bill and Erin paid in excess of $3,000 a year for administration fees/top-heavy testing/etc. for their profit-sharing/401(k), the SIMPLE IRA was going to cost less than $15 a participant per year, with no start up fees (note: prices among vendors may vary).

Bill and Erin proceeded to terminate the profit-sharing/401(k) plan. All of the employees rolled over their monies to their own Rollover IRA’s, and started contributions to their new SIMPLE IRA, including Bill and Erin! What did the cookie company employees think? “Sweet!

Allen Ostrofe, MBA CFP® is President of Ostrofe Financial Consultants, Inc., a S.E.C. Fee-based Registered Investment Advisor. Securities and Advisory Services offered through National Planning Corporation (NPC), member FINRA/SIPC, a Registered Investment Advisor. Ostrofe Financial and NPC are separate and unrelated companies. For questions or suggestions, visit ostrofefinancial.com. Branch address: 565 Brunswick Road, Ste. 15, Grass Valley.


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The Union Updated May 2, 2013 01:36PM Published May 7, 2013 09:13AM Copyright 2013 The Union. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.