Simple partnership, no non-partner employees. Income, etc all passed to partners via K-1.
Several partners are s-corps - individuals who've incorporated as a wrapper around themselves and the s-corp therefore receives the K-1 and passes the income as wages to those individuals.
Some retirement plan options:
The partnership establishes a SEP. Accounts are opened for each individual partner and contributions are made based on the income apportioned to the partners. (cheapest option with least burden on individuals).
The partnership establishes a formal 401(k), possibly with Roth options. (This would let those partners who earn less than $245k make bigger contributions than the SEP, as they'd get to make employee contributions and get above the 20% cap. (expensive option)
The partnership establishes *nothing* at all. All income is pass-thru to the partners via K-1s. Each partner may establish his or her own retirement plan as he or she likes - SEP-IRAs, solo-401(k)s, or nothing at all. (cheapest options, most flexibility, most burden on individuals to figure out what they want and implement it).
Any feedback or other ideas folks here can provide for me will be most appreciated. Thanks in advance!
Assuming all partners are mature adults and there are no plans to hire non-partner employees, I vote for keeping things simple. My experience is that the simplest plans/affairs are usually the best.
To be quite honest, I wasn't entirely certain that this was a viable option. I couldn't see any reason why it couldn't be, but reading through the literature which discusses retirement plans and partnerships, it always always discusses the context wherein the partnership sets up the retirement plan. I found one reference online wherein an a CPA indicated that dealing with it on the individual level was preferable and, as I said, I saw nothing which said it couldn't be done. I just haven't actually seen it done anywhere.
Given the possibility of doing it this way, I'm not entirely sure why any partnership would do it any other way unless, I suppose, the partnership has lots of employees in addition to the partners and wanted to offer the employees some options without the partners having to pay for it themselves (ie. they could go with a 401(k) allowing employee contribs).
I love the idea of having the partners each do as they like - there are a few who will want to do solo-401(k)s so they can keep funding non-deductible IRAs and doing tax-free conversions, and also maybe take advantage of Roth options in the solo-ks.
That reminds me - as far as I know, Schwab and Fidelity do not offer Roth options on their solo-k products. E-Trade does and, I believe Vanguard does. Have folks experience with any of the other low-cost providers?
I haven't looked at Vanguard's brokerage services in a long time - they used to be pretty expensive and I don't remember anyone really liking them for that. Direct fund accounts were fine, of course. Anyone using VBS now? How do you like it? I love the propect of no-commision access to Vanguard ETFs, so long as there are non-Vanguard ETFs available with good low commissions, too.
I have an account with VBS and they are fine. But I am not a very demanding user. I only make a hand full of trades in a year, so their commissions are not a big issue for me. Last time I looked, they were a few bucks higher than others, but I moved multiple accounts to Vanguard just to simplify things. That simplicity is worth $20 a year or so in extra commissions.
First, keep in mind that while the company can sponsor a retirement plan, the pan is for INDIVIDUALS. So the S Corps that are members won't get a contribution from the partnership. However, the partnership's contribution on behalf of the individual members will reduce overall income, providing a tax benefit to the S Corp owners.
When I first start talking to my clients about them starting a retirement plan the VERY FIRST question I ask is "how much money does the company have to spend on this?" This is important because of contribution costs, matching contribution costs and admin and maintenance costs.
If the company is small, doesn't have many employees or doesn't pay them much but wants to offer them an opportunity a SIMPLE IRA is a good choice. The company only has to match IF the employee defers income - no income, no deferral. This lets owners slant the plan in their favor. Deferrals cap out at around $10K annually, depending on age. There are virtually no plan establishment or maintenance costs BUT the company may have to pony up 3% of the employee's gross income. So if you have someone making $100K a year you could be on the hook for $3K for that person alone.
SEPs offer greater flexibility and larger contribution (and matching) amounts BUT they cost more. SEPs are funded with company money and you can't discriminate - so if your SEP puts in 25% of your salary it has to put in 25% of everyone's salary.
401Ks have annual maintenance costs too - about the cheapest I've seen is around $1K annually. BUT these can be set up so the company puts in NOTHING for the employees. You do have to be aware that these plans have top heavy testing rules so you can't favor an owner or highly compensated employee.
There are several other types of plans as well, some allowing as much as $165K in contributions per participant. BUT they are costly to maintain and are only a reasonable option if you have a LOT of money you want to shield.
If all you want to do is spend $5K or less per year per person your other option is to simply bonus the money to the employee and let them fund their own IRA account - deductible, nondeductible or Roth. Remember, employee deferrals to company sponsored plans still require the withholding and payment of FICA taxes. So paying the bonus to the employee lets them have withholding for FICA while they get the tax deduction on their personal return.
One of the things you need to look at are the common ownership antidiscrimination rules. I do NOT have a cite handy but I seem to recall that there are regulations that require that every company that is part of a commonly controlled group offer the same plan to all the employees. So if I own 20% in this partnership through my S Corp and I own at least 20% is my S Corp I may have to adopt the same retirement plan for all the employees in BOTH companies - you need to check on this before you set something up that could impact others in your group.
Gene and Bo, thanks for the suggestions. I think that for the folks in question, since the partnership has no non-partner employees, there's little reason for anything to be done at the partnership level. Looks like they're going to just shut down the whole qualified profit-sharing plan altogether and let individuals do the self-employeed thing on their own.
That said, we did price out some 401(k) options, both for running at the partnership level and for "solo" self-employed 401(k)s.
That Costco/ING/Sharebuilder plan is actually not that great a deal, but it's also not bad. Except for the solo-401(k) - for which it seems expensive. Schwab, Fidelity, ETrade and Vanguard all have solo-401(k) plans with no participant asset management fees or annual fees. They make money from folks either buying securities and paying commissions or from the revenue sharing for the no-transaction-fee funds they offer. In fact, ETrade and Vanguard both apparently offer not just solo-401(k), but solo-401(k) with *roth* options, too.
We got some pricing for doing a regular 401(k) at the partnership level, which would be a good choice if they had or planned on hiring additional employees to whom they'd wanted to offer a retirement plan. At the asset level we're talking here, assuming some reasonable proportion of the assets go into their preferred funds (ie. the ones with revenue sharing, or their own funds), there'd be anywhere from zero additional costs at all to as much as a couple of thousand dollars. Including everything - them acting as trustee, custodian, etc, doing the form
5500, etc.
Still, with no non-partner employees, just letting the self-employment income flow through to the individuals and letting the individuals do their own thing - SEP or solo-401(k) likely - looks like the most flexible and cost-efficient path for them. If anyone sees anything wrong with this plan, I'd really appreciate hearing it. Thanks again.
I chased the link Bo provided and the costs I saw looked very reasonable. I was not able to tell, and didn't have a lot of time to poke around so I could have missed it:
a - is the monthly admin fee per employee? b - is the monthly admin fee paid by the employee or the employer? c - Page 8 of the free report shows their average annual fee to be $1140 - pretty close to my $1K estimate; d - I could not tell whether their annual admin fee covers the 5500 tax return or not.
Even their cheapest plan (PLAN4TEN) costs $95 per month - or $1,140 a year - again, real close to my $1K estimate.
And this is just the ING Sharebuilder plan with the Costco Private Label.
I also noted in their literature that "index funds are hard to beat." I like index funds too, but I wonder if they offer other options. Using index funds is a great way to keep costs down but it also limits your investment options.
I think the big caveat here is to shop around - look for something that fits your needs - compare prices, by all means - then make an informed decision.
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