A mix of factors is driving these rising costs, from higher provider rates and the growing use of new therapies like GLP-1 medications to the increasing prevalence of chronic conditions such as cancer and diabetes. For municipalities and public employers already managing long-term retiree healthcare promises, these pressures can quickly escalate OPEB liabilities and strain local budgets.

But the good news is, there are steps you can take. Whether it’s reassessing plan design, prefunding liabilities, or revisiting actuarial assumptions, proactive management can help stabilize costs before they spiral further.

How This Affects Local Governments

1. Soaring OPEB Liabilities 

For many municipalities, healthcare benefits represent a significant portion of their OPEB obligations. As healthcare premiums continue to rise, these liabilities will increase, directly affecting government financial statements. Higher liabilities lead to increased annual contributions, which can severely strain budgets that are already dealing with other priorities like public safety, education, and infrastructure. 

2. Budget Strain and Taxpayer Burden

With healthcare costs rising at twice the rate of general inflation, local governments may need to raise taxes or cut services to cover the escalating OPEB liabilities and stay within budget. This puts them in a difficult position, especially those already struggling with tight budgets. Unfortunately in this situation there are no easy answers – push costs to employees, narrower networks, fewer covered services, etc. The reality is that as healthcare premiums grow, they consume a larger share of the budget, leaving less room for essential services. 

3. Increased Financial Volatility

As mentioned, OPEB liabilities are especially sensitive to healthcare inflation. When costs rise unexpectedly, local governments must adjust their contributions, leading to financial volatility. This unpredictability complicates long-term financial planning and can lead to larger-than-expected liabilities, which may disrupt bond ratings and their overall financial health. 

The Ripple Effect: Retirees Feel The Impact Too

Rising healthcare premiums not only impact local governments but also their retirees who depend on these benefits. For retirees with fixed incomes, higher premiums could mean paying more out-of-pocket for healthcare services, reducing their overall financial security. 

Local governments may feel pressured to shift more healthcare costs to retirees through increased cost-sharing or reduced benefits, which could lead to dissatisfaction among retirees and even legal challenges. 

So What Should You Do?

The first step, decide that now is the time for action. Here are some key strategies you can explore: 

1. Reassess Your OPEB Plans

You can explore options to reduce OPEB liabilities by adjusting your plan design – be aware that benefits may be protected by statute or State law. Are there opportunities to increase cost-sharing with retirees or introduce tiered benefits that offer more affordable options? Reviewing your plan now can help you find ways to mitigate the impact of the rising premiums before they become unmanageable. 

2. Consider Prefunding Your OPEB Liabilities

One of the most effective ways to manage growing OPEB liabilities is by pre-funding them through an OPEB trust. This allows governments to invest contributions and potentially earn returns, which can be used to offset future costs. Pre-funding is a proactive way to reduce long-term financial pressure. 

3. Update Financial Projects and Actuarial Valuations 

Rising healthcare costs should signal immediate updates to actuarial assumptions. If you fail to adjust for these healthcare cost increases, it could lead to unpleasant surprises in your financial reporting. Regularly reviewing and updating these valuations will provide a more accurate outlook and better inform your budget planning. 

4. Explore Group Purchasing 

If you are a smaller municipality, you may want to consider joining regional purchasing cooperatives to negotiate better healthcare rates. Collaborating with other local governments can increase bargaining power with insurers and help lower premium costs, reducing the burden on retirees and your municipality. 

Long-Term Outlook: Expect More Increases

Unfortunately, experts project that healthcare costs will continue to climb beyond 2025. Many hospitals have renegotiated contracts with insurers that include higher reimbursement rates, and new medical innovations, which are adding further pressure to employer health plans.

At the same time, some insurers are scaling back or exiting the Medicare Advantage market altogether, leaving fewer options for retirees and local governments that rely on these plans to manage post-employment healthcare costs.

For municipal employers, this means preparing for yet another year of elevated costs and increasing OPEB liabilities. Without proactive planning, these rising expense can quickly lead to budget strain and difficult decisions about the level of benefits you can realistically sustain.

The Bottom Line

Healthcare inflation isn’t a short-term hurdle, it’s an ongoing challenge that can quickly reshape long-term liabilities if unchecked. As you prepare your FY 2026 budget, now is the time to revisit your OPEB funding strategy, review actuarial assumptions, and assess whether your plan design still makes sense in today’s cost environment.

If you have concerns about how these changes will affect your municipality, or if you’d like help managing your OPEB liabilities, our team can help. Contact Odyssey Advisors to start the conversation.

The post Healthcare Inflation: What It Means For Local Governments appeared first on Odyssey Advisors, Inc.

Bottom Line Up Front

• If you have a full-time job and a side business with no employees, you can contribute to both a regular 401(k) and a Solo 401(k).
• Employee contributions are capped at $24,500 total across all 401(k) plans in 2026 ($32,500 if 50+ with catch-up).
• Employer contributions are separate for each plan – each employer can contribute up to $72,000, but this amount is reduced by any employee contributions made to that plan.
• If you contribute the full $24,500 as an employee, the maximum combined employer contributions across both plans would be $119,500, bringing the total possible contributions to $144,000 ($152,000 if 50+).

Absolutely! If you have a 9-to-5 with a company 401(k) plan and a side hustle with 1099 income, you might be leaving money on the table if you’re not using a solo 401(k). Many people don’t realize that having multiple income streams means you can also have multiple retirement plans – allowing you to stack contributions and maximize tax savings.

Unlike IRAs, which have a hard cap on contributions no matter how many you have, 401(k) plans work differently. Your side business opens the door to another retirement account, allowing you to save even more. The best part? You get to play both roles: employer and employee, meaning you can potentially sock away thousands more in tax-deferred (or tax-free, if Roth) savings. Let’s break down how it works.

Why Having Two Retirement Plans Can Be a Smart Move

Many people assume that if they have a 401(k) through their employer, they’ve maxed out their retirement contributions—but that’s not entirely true. If you also have a side business with a Solo 401(k), you have additional tax-advantaged savings opportunities. The key is understanding how the limits work.

A 401(k) has two types of contributions:

1. Employee Contributions: This is the portion you contribute from your paycheck or side business income. In 2025, the total employee contribution limit is $24,500 across all 401(k) plans ($32,500 if you’re 50+).
   
   
   • For example, if you contribute $10,000 to your employer’s 401(k), you can only contribute $14,500 more as an employee across either your employer’s plan or your Solo 401(k).
     
     
2. Employer Contributions (Profit-Sharing): This is where things get interesting. Employer contributions are separate for each plan because they’re based on each employer’s earnings.
   
   
   • Employer contributions are separate for each plan, meaning each employer can contribute up to $72,000, but this amount is reduced by any employee contributions made to the plan.
     
   • If you maximize employee contributions ($24,500), the combined employer contributions across both plans would be $119,500.
     

Unlike employee contributions, where the limit is shared across plans, the employer contribution limit applies separately to each plan – which is why a Solo 401(k) can be a powerful tool for increasing retirement savings.

Perks of Having Both a 401(k) and a Solo 401(k)

• Double the Savings Potential: While you’re limited on employee deferrals, employer contributions give you another bucket of tax-deferred savings. You get to wear both hats and can make contributions as both an employee and employer.
  
• Lower Your Tax Bill: Contributing more means reducing your taxable income from both your day job and side hustle.
  
• More Investment Choices: Employer-sponsored 401(k)s often have limited options, while solo 401(k)s can offer more flexibility, including real estate and alternative investments.
  
• Tax Planning Flexibility: You can choose a Roth or traditional for both plans, letting you balance taxable income now vs. tax-free withdrawals later.

Common Solo 401(k) Misconceptions

“If I max out my work 401(k), I can’t contribute to my Solo 401(k) at all.”

Not true. You can still make employer contributions from your self-employment income, even if you hit the employee limit at your day job.

“Solo 401(k)s are for full-time business owners.”

False! Even if your side hustle only brings in a few thousand dollars a year, you can still take advantage of tax-advantaged savings.

“I should just open a SEP IRA instead.”

Maybe, but Solo 401(k)s generally allow higher contributions at lower income levels because they let you contribute both as an employee and an employer. SEP IRAs only allow employer contributions.

Having two retirement plans isn’t just possible, it’s a smart strategy for anyone juggling a 9-to-5 and a side business. Next, let’s break down how to maximize your contributions without running into issues with the IRS.

Maximizing Contributions Without Overstepping IRS Rules

The key to maximizing contributions is understanding how the IRS limits apply across both plans. Here’s how to make the most of your retirement savings without accidentally contributing too much.

1. Know the Two Types of 401(k) Contributions
   
   There are two main types of contributions to be aware of:
   
   
   • Employe Deferrals: You can contribute up to $24,500 in 2026 ($32,500 if 50+) across all 401(k) plans combined.
   • Employer Contributions: Your employer (including your own business) can contribute up to 25% of your compensation from each job up to a total of $72,000 for each job (reduced by the amount of your employee contributions to that plan excluding the catch-up).
     
     
2. Max Out Your Employee Deferrals Wisely
   
   Since the employee contribution limit is shared between both plans, you’ll need to decide where to contribute first:
   
   
   • If your W-2 job offers a match, contribute there first to get free money.
   • Once you’ve maxed out your match, you can split additional deferrals between both plans or focus on the one with the better investment options and lower fees.
     
     
3. Use the Employer Contribution Loophole
   
   Even if you max out employee contributions at your W-2 job, your side business can still contribute to your solo 401(k) as an employer. Here’s how:
   
   
   • Sole Proprietorship / Single-Member LLC: Employer contributions are 20% of the net self-employment income (after deducting half of your self-employment tax).
   • S-Corp: Employer contributions can be 25% of your W-2 wages from the business (not total revenue). Remember that S-Corp dividends are NOT considered compensation for retirement plan purposes.
     
     
     
4. Consider Roth vs. Traditional Contributions
   
   If you expect higher income in retirement, Roth contributions (tax-free withdrawals later) might be better. If you want to lower your taxable income now, traditional (pre-tax) contributions make sense.
   
   You can mix and match: Roth for one plan, traditional for another.
   
5. Avoid Common IRS Pitfalls
   
   
   • Excess Employee Deferrals: You can contribute $24,500 to each plan (traditional, Roth, or combined). The limit is shared across every 401(k).
   • Miscalculating Employer Contributions: Employer contributions are separate, but they still can’t exceed 25% of your eligible earnings from each employer.
   • Missing the Tax Filing Deadline: Solo 401(k) contributions must be made by your business’s tax return deadline (including any extensions). A great tip? Set a calendar or phone reminder for when you want to contribute.
     
     
6. Track Contributions and Work with a Tax Pro
   
   401(k) rules can be complicated – especially with multiple plans. Keep a running total of contributions throughout the year and work with an accountant, TPA, or financial advisor to stay within IRS guidelines.

The Bottom Line

By strategically using both a Solo 401(k) and an employer-sponsored 401(k), you can maximize tax-deferred (or tax-free) savings, reduce your taxable income, and accelerate your retirement goals as both an employer and employee. It definitely pays to know your retirement plan options.

Keep in mind that you need to understand the difference between employee and employer contributions to avoid overstepping IRS rules. That’s why it’s important to work with an experienced retirement third-party administrator, financial advisor, or tax pro to ensure you’re making the most of your savings while staying compliant.

The post Can I have a Solo 401(k) and a Company 401(k)? appeared first on Odyssey Advisors, Inc.

Bottom Line Up Front

• A Cash Balance Plan is a type of Defined Benefit Plan that allows large tax-deductible retirement contributions that are tax-deferred and protected from creditors.
• These plans are ideal for business owners and self-employed individuals who want to ramp up their retirement savings while reducing their tax burden.
• Typically, Cash Balance plans work best for people 50 and older, with stable, predictable, high income.

What is a Cash Balance Plan?

A Cash Balance Plan is a Defined Benefit Pension Plan, IRS § 401(a), often used by small business owners. It allows for significant tax-deductible contributions and retirement asset accumulation. Contributions are tax-deferred, and your assets are protected from creditors. In short, it’s an excellent tool for tax planning, asset accumulation, and asset protection.

Key Benefits of a Cash Balance Plan

Most business owners adopt a Cash Balance Plan to supercharge their retirement savings while taking advantage of generous tax deductions. Unlike 401(k) Profit Sharing Plans, these plans offer higher annual contribution limits, which means you can put away more for retirement and defer more taxes.

Potential Annual Retirement Savings & Tax Deferral for 2025

For a full breakdown of the 2026 cash balance plan and 401(k) contribution limits by age, see our 2026 CB Plan Contribution Limits PDF.

What is the difference between a Cash Balance Plan and a 401(k) Plan?

Both Cash Balance and 401(k) Plans are considered “qualified plans” under IRS § 401, but there’s a key difference:

• Cash Balance Plan: Defined Benefit Plan – the retirement benefit is defined, not the contribution.
• 401(k) Plan: Defined Contribution Plan – the contribution is defined, not the retirement benefit.

In a 401(k) plan, the employee assumes the investment risk. With a Cash Balance Plan, the employer bears that responsibility. Plus, Cash Balance Plans must offer a lifetime annuity option and are typically backed by the Pension Benefit Guaranty Corporation (PBGC), which provides insurance for such benefits.

Can I have a Cash Balance Plan if I already have a 401(k) or IRA?

Yes! Cash Balance Plans aren’t designed to replace your 401(k) or IRA – they’re meant to complement them. Think of it as stacking multiple retirement plans to maximize your savings potential.

Who Should Consider a Cash Balance Plan?

A Cash Balance Plan may be a good fit for you and your business if:

• Your company has fewer than 10 employees.
• The owners are typically older than the employees.
• You have a stable, high income with some predictability.

How does a Cash Balance Plan work?

Each participant in a Cash Balance Plan gets a “pay credit” every year, which is the amount the employer contributes on their behalf. The contribution can be a flat dollar amount or a percentage of income and may vary between employees and owners, as long as it passes compliance testing. For example, $1,000 annually per participant or 3% of a participant’s annual income. Each company’s funding formula varies based on the employer’s goals and their employee demographics.

Additionally, accounts earn interest on accumulated contributions each year, called interest credit. Usually, a fixed rate like 5% or tied to an index, such as the 30-year Treasury yield.

Self-employed? Yes, You Can Set Up a Cash Balance Plan

If you’re self-employed, a Cash Balance Plan can be a powerful retirement tool. You can combine it with other plans to significantly increase your retirement contributions.

What is the maximum amount I can get from a Cash Balance Plan?

As noted above, a Cash Balance Plan is a defined benefit plan, so there are limits on the maximum benefit that may be paid. IRS § 415(b) limits the benefit that may be paid from a defined benefit plan ($285,000 annually at Normal Retirement Date for 2026, indexed). This amount is reduced if the participant has less than 10 years of participation in the plan, as well as for retirement before the Normal Retirement Date. Assuming that the participant is at least age 62 with a minimum of 10 years of participation in the plan, the maximum lifetime lump sum payable from a Cash Balance plan is approximately $3.6 million for 2026 (indexed based on interest rates, mortality, etc.).

How much can I contribute to a Cash Balance Plan?

The maximum amount you can contribute is limited by your compensation and age. For example, if you earn $360,000, you could roughly contribute:

• $195,000 at age 40
• $280,000 at age 50
• $415,000 at age 60

Does a Cash Balance Plan Affect My 401(k) Contributions?

The tax deduction limit for the combined plans (Cash Balance & 401k) is greater than 25% of covered payroll and the minimum required funding for the Cash Balance Plan. However, if employer contributions to the 401(k) Plan do not exceed 6.0% of covered payroll, the 25% limit does not apply. If the Cash Balance Plan is covered by the PBGC, higher contribution limits will apply.

How is My Cash Balance Benefit Determined?

There are three main components to your Cash Balance benefit:

1. Pay Credits – Contributions are typically a percentage of compensation (typically on an annual basis).
2. Interest Credits – Usually a fixed rate or tied to an index (like the S&P 500 or Treasury rates). The interest credit frequency is defined by the plan but is normally credited annually.
3. Actuarial Equivalence – The plan outlines how the balance is converted to a benefit (lump sum or annuity) at retirement.

Can I Use a Vesting Schedule?

Absolutely! Cash Balance Plans can use a vesting schedule, typically no more than three years. Many plans use “cliff” vesting, where you’re 100% vested after three years, though some use graded schedules with partial vesting sooner. When an employee terminates employment before completing the required vesting service for 100% vesting, any non-vested amount is “forfeited” and may be used to offset or reduce the employer’s future contributions.

How Long Do I Need to Keep the Plan?

All qualified retirement plans, including Cash Balance plans, must be intended to be “permanent” at inception. While there’s no hard rule, it’s generally recommended to keep a plan in place for at least five years to meet the permanency requirement. However, unforeseen circumstances like a business sale or revenue change could justify an early termination.

Advantages & Disadvantages

The advantages are well known and often highlighted, but it is important to remember that large tax-deductible contributions and flexible plan design do carry the disadvantage of minimum required contributions.  

Investing Cash Balance Plan Assets

Unlike a 401(k) Plan, a Cash Balance Plan’s assets are pooled and invested by the employer. You should work with your investment advisor to determine an appropriate investment policy given the plan’s defined interest crediting method and the plan sponsor’s tolerance for contribution volatility. 

A conservative to moderate asset allocation (with 3-7% per year) is common to manage contribution volatility and prevent overfunding.

Is a Cash Balance Plan Right for You?

If you’re self-employed or own a business with steady income, are over 35, and want to boost your retirement contributions, a Cash Balance Plan could be a smart move. These plans are very common for professional services firms, but they work for any business with predictable income.

There are a lot of factors to consider when adding a new retirement plan as a business owner. An actuary who specializes in retirement plans, specifically defined benefit and cash balance plans, can help you understand if a Cash Balance plan is right for you based on your situation and goals. 

What is the deadline to establish a new Cash Balance Plan?

With the passage of the SECURE Act, the deadline to establish a plan is the business’s tax filing deadline (including extensions). The plan must be both executed and funded by that deadline, so it is important to begin working with an actuary and your financial professional well in advance of that date to ensure you can meet the deadline.

How Do I Set Up a Plan?

Start by working with an actuary to design the plan that fits your goals. You’ll also want to work with your financial advisor to establish a trust for plan investments. It’s best to allow four to six weeks for everything to be in place.

If you have questions on how to align your business needs with your personal goals, check out our form below. If you would like to get a free retirement plan review, you can reach out to us directly here. 

The post What is a Cash Balance Plan? Your Top Questions Answered appeared first on Odyssey Advisors, Inc.

Bottom Line Up Front

• This article provides an overview of the different financial asset classes, including Domestic Equities, International Equities, Fixed Income, Alternatives, and Real Estate.
• Each asset class has its own characteristics and risk profiles. Domestic Equities vary in size and growth potential, while International Equities involve currency exchange risk. Fixed Income offers predictable payments, while Alternatives encompass a diverse range of investment types and Real Estate includes rental properties, REITs, and raw land.
• Understanding each asset class can help you make informed investment decisions and create a diversified portfolio based on your risk tolerance and investment goals.

From pension plans, OPEB plans, 401(k) plans, or personal investments many people are faced with the dilemma of understanding various types of financial assets. This article will help you start to understand what these asset classes are and some of their basic characteristics.

You can also check out our on-demand webinar on this topic as well: Understanding Asset Allocation

What is Market Capitalization?

Conversations about asset allocation will almost always contain terms like Market Cap, Large Cap, Small/Mid Cap, etc. I’ve had several conversations where people ask, “Why are Markets or Equities capped?” Whenever you see the word “Cap” in terms of asset allocation we aren’t talking about a maximum limit on assets, the term “Cap” is short for Capitalization. Market Capitalization means the total value of a company on a financial market. The formula for calculating the market capitalization of a company is the number of shares outstanding x the cost per share of that company. For example, the Market capitalization of Coca-cola:

• Number of shares outstanding – 4.3 billion
• Cost per share assumed – $60.00
• Market capitalization – 4.3 billion x 60 = $260 billion

Domestic Equity – Large Cap

Our first asset class is “Domestic Equity – Large Cap”. Domestic Equity means that this is a U.S.-based company and Equity means we are talking about their stock or ownership shares of the company. Large Cap means the market capitalization of these companies is “Large”. Large-cap is not a single definition, different professionals will have differing opinions on what classifies a company as “Large”. In general, a market cap of about $10 billion is considered large. Large companies are more likely to be household names as well. Some that you’ve probably heard of are Apple, Microsoft, Amazon, Coca-Cola… and so on.

What are some characteristics of large-cap companies?

They tend to have at least nationwide business operations and there’s a very good chance they have large international operations as well. In general, there is less room for rapid growth for these companies. They don’t have many large untapped markets they can move their products to. On the inverse side, these companies tend to have more stable earnings than smaller companies, so they are less likely to have extreme losses in revenue.

All of that backdrop leads to a projected return (based on the 2022 Horizon Survey of Capital Market Assumptions) net of inflation of:

Domestic Equity – Mid Cap

The market capitalizations for Mid Cap companies will, again, not vary based on who you ask. However, some general guidelines include: Mid Cap companies have a market cap of $2-$10 billion. Many of these companies are still household names, although fewer are in the Large Cap category. Some Mid Cap companies you may recognize are: Yet, Hostess Brands, Harley Davidson, B.J.’s Wholesale, Crocs, and Texas Roadhouse.

Mid Cap companies compared with Large Cap companies will tend to have slightly more earnings and share price volatility. One way that is measured is with “Beta” (which will also be referred to with just the Green alphabet letter “β”). Beta measures the increased volatility of a stock or index compared to another index (generally the S&P 500). A Beta of 1.1 means that whenever the S&P moves 1% up or down the corresponding stock or index will move 1.1% up or down. Thus, a Beta above 1 means increased volatility. The Beta for a Mid Cap market index is 1.08 showing that in general Mid Cap companies are more volatile than Large Cap meaning higher potential gains and higher potential losses come with the Mid Cap territory.

While smaller than Large Cap, Mid Cap companies will still have large operations and are likely to be nationwide operations and may have some international operations as well. These companies may have more room for rapid growth if they can expand to new markets.

Domestic Equity – Small Cap

The market capitalization for Small Cap companies is generally considered to be $250 million – $2 Billion. As you start looking through Small Cap company index lists fewer of the names become recognizable household names for most people. Some names you may know are Ethan Allen and Winnebago.

Small Cap companies will tend to have even more earnings and price volatility with a Beta of 1.13, meaning these companies will tend to have even higher potential for outsized gains or outsized losses. These companies tend to have more regional operations and may have untapped markets that they could break into, rapidly expanding their market value.

The projected return for Small/Mid Cap companies net of inflation is: 

International Equity – Developed Market

International Equity, first off, is stock ownership in non-U.S.-based companies. Developed markets mean that these investments will be in areas that have developed economies and financial systems. Examples of Developed Markets include England, Ireland, Australia, Germany, France, and Japan.

International Developed companies tend to have low social and political risk. In other words, these governments and social frameworks are unlikely to create a scenario where a company experiences major changes to its business for social or political reasons. One risk that is introduced is currency exchange risk. Currency exchange risk is the variability that comes from the relative value change between local and foreign currencies. For example, if you bought shares in a U.K.-based company in pounds you had to exchange dollars for pounds to make the purchase, then when you go to sell the investment, you need to exchange the pounds back into dollars. Not only are you experiencing the risks associated with a business over that time period, but your investment can also change in value because the dollar becomes more or less valuable compared to the pound.

The projected return for International Developed companies net of inflation is:

International Equity – Emerging Market

Emerging Markets are in countries that don’t have a long-established industrial and economic environment, but are on the path to being stable and established economies. Examples of emerging Markets include Brazil, Turkey, India, China, and South Africa.

These companies have a higher potential for political or social risk and currency exchange risk. The tradeoff is that there is potential for companies in these markets to experience very rapid growth through stabilizing social, political, or economic factors as well as lots of opportunity for companies to grow in undeveloped markets. The downside is that these companies have a higher risk of volatility and a higher risk of severe losses.

The projected return for International Emerging companies net of inflation is:

Fixed Income – Domestic and International

Our next class moves us away from the equities markets and into fixed income. Fixed-income securities have a fixed payment rate over the lifetime of the investment. Investments in this category include Bonds, Treasuries, CDs, and Preferred sales. All of these investments pay a fixed rate generally annually or semi-annually, over a certain time period. Domestic Fixed income invests in these investments in U.S.-based companies or municipalities.

There tends to be less risk in fixed-income investments because the payments to the investor are known rather than being based on the company’s performance like equity investments are. Fixed-income investors also tend to be paid first in the event of bankruptcy, so there is less risk of a total loss in the investment. Along with the decreased risk comes decreased expected returns.

International fixed income has the same characteristics but introduces currency exchange risk. There is also some diversification that comes from International fixed income as the “debt cycles” may be different for international companies and municipalities compared with the U.S.

The projected return for Domestic and International Fixed Income net of inflation is:

Alternatives

The next asset class to cover is Alternatives. This can be a tricky asset class because a lot of different investments are categorized as Alternatives. We’ll briefly go over some of the major Alternative investment types:

• Commodities – Metals, wood, animal or plant produce, oil, etc. Think gold, silver, and raw materials
  • Adds diversification to a portfolio
• Hedge Funds – An investment vehicle that generally uses long and short positions to achieve a return in any market environment
  • Can invest in anything
  • Often have high expenses to cover active management
  • Can use leverage
  • Can limit liquidity
• Limited partnerships – Business structure often used to facilitate investments in private companies
  • Access to non-publicly traded companies and business opportunities
  • Low liquidity
• Private Equity – Invest in private businesses, often focused on buyouts or buying struggling businesses to turn them around
  • Access to non-publicly traded companies and business opportunities
  • Often use leverage to increase returns, also increasing risk
  • Low liquidity
• Venture Capital – Invests mostly in startup companies that are not publicly traded with the goal of seeing a few become large publicly traded companies
  • High potential returns and losses
  • Low liquidity

The projected return for Alternatives net of inflation is:

Interested in learning more? Check out our previously recorded webinar with Kathleen Glowacki on Demystifying the World of Alternative Investments

Real Estate

Real estate can be broken into categories, for this summary, we’ll break it into three categories: Rental Property, REITs, and Raw Land.

The projected return Real Estate net of inflation is:

Putting all of these asset classes together we can create a hypothetical portfolio and show expected portfolio returns:

There is certainly much more that can be covered in the area of asset allocation. Hopefully, this has helped you get a better understanding of what various asset classes are and some of their characteristics. If you have any questions or if you have any asset allocation questions you’d like us to cover in another article, please let us know! You can reach us here.

The post Understanding Asset Allocation appeared first on Odyssey Advisors, Inc.

Bottom Line Up Front

• A 401(k) plan can provide many benefits to both you and your employees, such as tax savings, retirement savings, and the potential for employer-matching contributions.
• To start a 401(k) plan, you’ll need to find a provider, determine which plan would best fit you and your employees’ needs, establish a plan document, onboard your employees, and establish a set of procedures in order to keep the plan running smoothly. 
• A TPA is a company that specializes in qualified plan administration and they can help set up your plan and perform a number of the day-to-day administrative tasks of running a plan. 

What are 401(k) plans? 

401(k) plans are a type of retirement savings plan that’s offered by many employers. It’s named after the section of the Internal Revenue Code that defines it. 401(k) plans allow employees to save and invest a portion of their income for retirement on a tax-deferred basis. This means that the employee does not pay taxes on the money that they contribute to the plan until they withdraw it in retirement. Many 401(k) plans also offer employer matching contributions, which can help employees save even more for retirement. Additionally, many 401(k) plans offer a Roth option whereby employees contribute on an after-tax basis but all earnings will be tax-free upon retirement.

The Benefits of Starting a 401(k) Plan For Your Business

Many employers offer different benefit programs to attract and retain talent. The benefits they offer ensure their employees feel valued and help them build financial security. It has become standard practice for a business to offer a 401(k) plan which means those that aren’t currently offering a similar plan, can be seen as lacking. 

There are also tax benefits for sponsoring a 401(k) plan. Employer contributions to the plan are deducted from the employer’s federal tax return, as long as they do not exceed IRC limitations. Elective deferrals and investment gains are also not currently taxed and enjoy tax deferral until distribution. 

When the SECURE 2.0 Act was signed into law, it included enhanced tax credits for small businesses (up to 50 employees) that start a new 401(k) plan. The new credit allows you to claim a tax credit of 100% of the startup costs (capped at $5,000 per employer per year for three years). However, it does phase out for businesses with 51 to 100 employees.

You can also earn an additional $500 tax credit by adding an automatic enrollment feature to a new or existing 401(k) plan which is available for the first three years the feature is effective. 

Now if combined, these credits can total up to $5,500 per year for a total of up to $16,500 for 3 years. 

How to Start a 401(k) Plan for a Small Business?

To start a 401(k) plan for your business, there are 5 steps you’ll need to take.  

The IRS covers the initial steps, but if you’d rather not wade through it, here’s an easier step-by-step guide. 

1. Find Your Team 
2. Choose a 401(k) Plan That’s Right for You and Your Team
3. Adopt a Written Plan & Trust Fund
4. Onboard Employees
5. Keep the Plan Running Smoothly

Working with an expert, they can provide guidance in order to design the best plan to suit your business’s needs. 

Step 1: Find Your Team

This part is highly important when starting a 401(k) plan. You’ll want to do some research to find the best firms that provide recordkeeping and third-party administration (TPA) services for 401(k) plans. Focus on providers that can serve you and your employees long-term with extensive resources and excellent customer service. 

What Should I Look For in a 401(k) Provider?

When choosing a 401(k) provider for your business, there are several factors you should consider. Some of the most important include the provider’s reputation and track record, the fees and expenses associated with the plan, the investment options offered, the level of customer service and support provided, and the flexibility of the plan. You should also consider whether the provider offers any additional services, such as financial planning or educational resources, that could be beneficial to your employees. It is a good idea to compare the features and costs of different providers before making a decision. 

Here’s why you might want a TPA and how to hire the right one

Step 2: Choose Which 401(k) Plan Is Right for You and Your Team

Once you’ve found a provider, it’s time to figure out which plans fit both your business’s and your employee’s needs. This is where your provider can start to guide you in the right direction based on their experience with companies similar to yours if you’re unsure. It’s also important to do your own research as well. Here are a few 401(k) plan options available to businesses regardless of size: 

1. Traditional 401(k) plan: this is the most flexible option because employers can decide when, how, and if they want to make contributions to employee accounts. Bear in mind, that these plans are subject to annual IRS nondiscrimination testing.
   
2. Safe Harbor 401(k) plan: this plan is similar to a traditional 401(k), but requires that employers contribute to their employees’ accounts that are fully vested when made. There are also specific rules regarding how contributions need to be structured. However, these plans have a safe harbor status which means they are exempt from some annual IRS non-discrimination tests while standard plans must pass these tests each year.
   
3. Automatic enrollment 401(k) plan: This plan allows you to automatically enroll employees and place deductions from their salaries in certain default investments unless employees elect otherwise. Employers may choose this option as a way to increase participation in their 401(k) plans. Contributions to this plan qualify as elective deferrals. 
   
   According to one of the largest 401(k) providers, Vanguard Group, 92% of new hires were still contributing to their 401(k) plan three years after being automatically enrolled and for those with voluntary enrollment, only 29% were still saving.

Step 3: Adopt a Written  Plan & Trust Fund

Once you’ve determined what plan you’ll be using, you’ll need to create a written document that serves as the foundation for day-to-day plan operations. If you choose to hire a TPA or plan administrator, they will typically take care of creating this document. You’ll want to make sure the following items are included in your plan document: 

• Description of benefits & features of the plan
• Employee eligibility 
• Summary Plan Description (SPD)
• Vesting schedule (if needed)
• Contact information for all parties involved with the plan
• Distribution management
• Any additional details such as employer matching, profit sharing, etc. 

Setting up a Trust Fund for Plan Assets

The plan’s assets are required to be held in a trust to ensure that they are only used for the benefit of plan participants and their beneficiaries. You also need to determine a trustee to handle the contributions, plan investments, and distributions to and from the plan. 

Step 4: Employee Onboarding

Once the plan is starting to come together, you must notify all eligible employees about the plan benefits and requirements. You’ll need to do this about 30 days in advance. This is where a summary plan description (SPD) would come into play. An SPD is a primary way to share information about the plan and how it operates with eligible employees and their beneficiaries. In addition, you may want to share the benefits/perks of joining your 401(k) plan. 

Holding an all-hands meeting to go over the new plan and allow for an open Q&A can help your employees get a better understanding of the new plan. Some common questions plan participants may ask about the new plan: 

• Will there be an employer match?
• What types of plans are available and what are their features?
• Is there a minimum/maximum I can contribute to the plan?
• How do I set it up?
• What’s the vesting schedule look like?
• What are the investment options & can we select our own?
• Am I required to enroll in the company’s plan?
• At what age do payouts begin/when are we required to start taking payouts?
• Are we allowed to borrow from the account and if so, are there any penalties or restrictions?

Step 5: Keep the Plan Running Smoothly 

Annual Nondiscrimination Testing

The IRS requires that certain retirement plans perform a non-discrimination test every year. These tests are used to determine if the plan is disproportionately benefiting highly compensated employees (HCEs) over non-highly compensated employees (NHCEs). If the plan fails these tests it can lose the tax deductions it receives for any contributions made to the plan. 

Disclosing Plan Information to Participants

As mentioned above, there are certain documents that must be disclosed to the plan’s participants in order to keep them informed about the basics of the plan, make them aware of any changes, and allow them to make any decisions or changes in a timely manner. 

There are 6 different notices that should go out as needed: 

• The summary plan description (SPD) is a basic descriptive document geared towards the plan’s participants that explains the plan’s features and what to expect from the plan. It can also include information regarding when and how to become eligible to participate, the vesting schedule, how to file a claim for the benefits, etc. 
• A summary of material modification (SMM) notifies participants of any changes that are made to the plan or the information that is included in the SPD. 
• An individual benefit statement (IBS) is a statement you must provide participants with information about their account balances and benefits. 
• A summary annual report (SAR) is a one-page summary of the important information from your Form 5500 and the plan’s finances that get distributed to the plan’s participants. This form is required by ERISA to be distributed annually and if/when a plan participant requests it. 
• A blackout period notice gives participants an advance notice of when a blackout period will occur. A blackout period is a time when participants won’t be able to access their 401(k) accounts because a major plan change is being made. If the blackout is going to last for more than three days, you must provide the notice. It must be sent at least 30 days out, but no more than 60 days out from the start of the blackout. 

Government Reporting

In addition to compliance testing, the IRS and Department of Labor (DOL) require you to file an annual report which discloses plan information and its operation. The main form used for this is Form 5500. 

Recordkeeping 

You’ll also need to develop a recordkeeping system. This system will help you keep track of earnings and losses, plan investments, expense, and benefit distributions in participants’ accounts. The investment provider will usually provide these recordkeeping services in combination with your TPA.

This system will also help you prepare for your annual return/report that must be filed with the Federal government. 

The Best Time to Start a 401(k) Plan

The best time to start a 401(k) plan for your business is as soon as possible. This is because a 401(k) plan can provide many benefits to both you and your employees, such as tax savings, retirement savings, and the potential for employer-matching contributions. Additionally, establishing a plan can help you attract and retain talented employees by offering a valuable benefit. While there may be some initial costs and administrative tasks involved in setting up a 401(k) plan, the long-term benefits can make it well worth the effort. 

Starting a 401(k) Plan Doesn’t Need to Be Overwhelming

Starting a new 401(k) plan will take some time and preparation and it can be overwhelming when you see everything laid out like above. But it doesn’t have to be. Once the above decisions are made, you can work with a TPA who can guide you through the entire process and take on the administrative tasks. 

At Odyssey Advisors, we can help you cut through the complexity, make informed and strategic decisions, and design a plan that is tailored to meet both your personal and professional needs. If interested, you can schedule a no strings attached consultation with one of our TPA specialists here. Seriously, no strings.

And if you’re looking to terminate a 401(k) plan, take a look at our guide here.

The post Step-by-Step Guide to Starting a 401(k) Plan appeared first on Odyssey Advisors, Inc.

Bottom Line Up Front

• The IRS requires that most plans perform an annual nondiscrimination testing to determine whether or not all employees are treated equally as far as tax advantages and contributions go. 
• The nondiscrimination testing separates employees into two groups: non-highly compensated employees (NHCEs) and highly compensated employees (HCEs).
• To find out which employees are considered highly compensated employees, the IRS has two tests: an ownership test and a compensation test.

What is a Highly Compensated Employee?

Internal Revenue Service (IRS) Section 414(q) sets forth two tests to determine whether an employee is an HCE: an ownership test and a compensation test.  If you meet the standards of either of these tests, then you are deemed to be an HCE.

• Ownership test: Have you owned at least 5% of the sponsoring company at any point during the current or prior plan year?
• Compensation test: Did you receive compensation of at least a certain amount determined by the IRS ($135,000 for 2022 and $150,000 for 2023) in the prior plan year? This amount increases with inflation at $5,000 intervals.

If one is classified as a highly compensated employee then their plan contributions are limited because the IRS wants to ensure that contributions aren’t disproportionately benefitting HCEs over NHCEs. 

How to Identify if Someone is a Key Employee?

The IRS has three set tests to determine whether an employee is a Key Employee: a 5% ownership test, a 1% ownership test, and an officer test.  If you meet the standards of any of these tests, then you are deemed to be a Key Employee.

• 5% Owner test: Have you owned at least 5% of the sponsoring company at any point during the current or prior plan year?
• 1% Owner test: Have you owned at least 1% of the sponsoring company and did you receive compensation in excess of $150,000 for the current plan year? This dollar amount is set and does not increase with inflation.
• Officer test: Are you an officer of the sponsoring company and did you receive compensation in excess of an amount determined by the IRS ($200,000 for 2022 and 2023) in the current plan year? This dollar amount increases with inflation at $5,000 intervals.

How to Identify if Someone is an Owner?

Someone is deemed to be an owner if they have owned at least 5% of the sponsoring company at any point during the current or prior plan year.  This can mean different things under different company entity types.

• Corporation: The greater of the value of all classes of stock held by the individual as a total percentage of the value of the company, or the voting power of all classes of stock held by the individual as a percentage of all stock with voting rights.
• Partnership: The greater the percentage of the capital interest or profit interest.
• LLC or LLP: The percentage of membership interest out of the total membership interest.

Additionally, if you have the option to acquire stock, even if you have not exercised those options yet, they are also used to determine whether you are an owner or not.

What is Ownership Attribution and How Does It Work?

In short, if you are deemed to be an owner of the sponsoring company then your family members may be deemed to be owners of the sponsoring company as well.  Below is a chart to describe which family members have attributed ownership and which are not:

What Do These Different Designations Mean and Why Do They Matter to Me?

The name of the game is non-discrimination testing.  The IRS requires that most retirement plans perform a non-discrimination test every year. These tests are used to determine if the plan is disproportionately benefiting highly compensated employees over non-highly compensated employees (NHCEs).  If the plan fails these tests it can lose the tax deductions that it receives for the contributions made to the plan.

The Key Employees designation is used in determining if the plan is considered “top-heavy”.  A plan is considered top-heavy if the total account balances or total present value of accrued benefits is disproportionately attributed to Key Employees.  If a plan is deemed to be top-heavy it may be required to make minimum contributions to the plan for non-key employees.

The owner designation is important to keep in mind because of the attribution rules listed above.  When you are deemed to be an owner you are then deemed to also be a Key Employee and a highly compensated employee.  This can have a large effect on your non-discrimination testing.  The most common issue we see is that an owner will hire their child – if the plan design doesn’t explicitly address benefits paid to key employees, this may result in them receiving employer contributions or benefit allocations. Often, the owner’s child is one of the youngest employees at the company – so even if they are paid a very small amount they are still considered a highly compensated employee and can cause your non-discrimination tests to fail.

Whenever you’re ready, here are three ways we can help:

1. Business owners, get a free review of your current retirement plan design here.
2. Minimize your tax burden and secure your employees’ futures here.
3. Financial advisors, help your clients defer income while providing retirement benefits for their employees here.

The post How to Identify a Highly Compensated Employee appeared first on Odyssey Advisors, Inc.

Bottom Line Up Front

• Offering a 401(k) plan can help small businesses recruit and retain top talent and provide significant tax breaks and deductions.
• Finding the best retirement plan for your business requires an in-depth look at what your goals are, where your business is at, understanding what each plan has to offer, and more.
• This article is for businesses who want to know if they should also offer a Roth 401(k).

Congrats! You’ve reached the stage in your business where it’s time to set up a 401(k) plan. The availability of a 401(k) raises the status of your company and demonstrates your commitment to your employees’ future. Aside from the tax savings (which are pretty great when it comes to that increasingly stressful bottom line), offering good benefits leads to better morale, having employees stay with you longer, and attracting the right employees.

If you landed on this article, you’re probably debating on whether to add a Roth option along with the traditional 401(k). If so, sit back, relax, and grab a beverage of your choosing because I’ll show you why a Roth 401(k) is a good ace to have up your sleeve.

Finding the best retirement plan for your business

First, you want to look at a few factors that will help aid your decision. What does the structure of your business look like (are you set up as an S corp, an LLC, etc.)? What are you looking to get out of the plan?

Each company is unique. There’s not a one-size-fits-all, not even a one-size-fits-most plan. You’ll want to look at the tax advantages, understand what your long-term goals are (succession planning, how long you plan on owning the business, etc.), and where you’re at in your business.

For example, a business owner that has 10 employees, may still be dedicating most of their time to the business. They’ve got enough on their plate so the conversation might be focusing on how they can have a retirement plan that will attract employees and retain their current ones, while not having to spend a lot of time focusing on the administration of the plan.

But it’s important to note, that while a 401(k) is usually targeted toward businesses with hundreds of employees, that’s not to say that a small business shouldn’t open one. These plans have a lot of advantages that you can’t get with another plan so it may still be a good idea to explore even if you have one employee.

Can an LLC member contribute to a 401(k)?

But if you’re reading this you’ve probably already done a fair amount of research. So let’s look at how a Roth 401(k) option can enhance your current or future traditional 401(k).

How a Roth 401(k) compares to a Traditional 401(k)

Both the Roth and pre-tax (traditional) 401(k) options are tools for you and your employees to save toward retirement. The biggest difference between a Roth 401(k) and its traditional counterpart are the taxes. With a Roth 401(k), you pay taxes now and with a traditional 401(k), you pay taxes later.

Here’s a quick side-by-side rundown of how these two plans compare:

Top 5 benefits of a Roth 401(k)

1. Earnings grow tax-free
   
   Because contributions are made after taxes have already been taken out, that means any earnings accumulated grow tax-free.
   
   
2. Ability to rollover to a Roth IRA
   
   Like a traditional 401(k), a Roth 401(k) is subject to required minimum distributions (RMDs) at age 72. A Roth IRA, however, is not. One benefit of choosing the Roth option is that you can roll over your 401(k) into an IRA and avoid having to make RMDs.
   
   
3. Higher contribution limits than an IRA
   
   The annual contribution limit for a traditional and Roth 401(k) for 2022 is $20,500 (or $27,000 if you’re age 50 or older). This is much higher than the IRA contribution limit which is $6,000 ($7,000 if you’re age 50 or older).
   
   401(k) and Retirement Plan Limits for 2022
   
   
4. Tax-free distributions during retirement
   
   Contributions are made after-tax which means that qualified withdrawals in retirement are tax-free as long as you have met the 5-year rule. You must have your Roth 401(k) account for a minimum of 5 years in order to make a tax-free distribution.
   
   
5. Advantageous for those who believe their tax rate will be higher in the future
   
   Let’s say you’re paying 12% in federal taxes and you plan to make more money in the future. This means the rate at which you’re currently taxed will most likely be higher in the future. This is often the case for younger employees and those near the beginning of their careers.
   

A great way to think about it – you’ll get your taxes out of the way early on at a lower rate and then you get to enjoy the earnings later on in life without the headache of taxes.

For example:

Assuming someone who is making $40k at the beginning of their career and paying very little in federal tax, plans to make more as they advance, a Roth 401(k) will only be marginally more expensive than a “regular” 401(k) at first. Down the line, when they’re ready to withdraw funds in retirement, it will be much cheaper.

The Bottom Line

Whether you’re already sponsoring a 401(k) plan or are looking into opening a traditional 401(k), adding a Roth option gives your employees the choice to choose how they’d like to save for their retirement. If you want to learn more about these two plans and other investment options, it’s always a good idea to reach out to an investment professional, a financial advisor, and/or a retirement consultant.

Whenever you’re ready, here are three ways we can help:

1. Business owners, get a free review of your current retirement plan design here. 
2. Minimize your tax burden and secure your employees’ futures here.
3. Financial advisors, help your clients defer income while providing retirement benefits for their employees here.

The post Should You Offer a Roth 401(k) Option? appeared first on Odyssey Advisors, Inc.

Bottom Line Up Front

• Your employee compensation package may not be getting the due diligence it should. 
• Many are hyper-focused on the amount of their salary and never learn the total cost of their benefits. 
• Employers can use a Total Compensation Statement to communicate what they provide beyond base pay.

Even though you have put together a comprehensive (and pricey) benefits package, your employees might not know or understand the total value of what you offer. When looking for a job, most people focus on finding one that pays the highest base pay and completely overlooks the cost of any extra benefits provided.

As a business owner, you know how important it is to offer a competitive employee benefits package and you know how much each benefit costs. But how do you communicate this with potential hires and your current employees?

The Biggest Misunderstanding When it Comes to Employee Compensation

When most employees think about their compensation they think of their base pay and PTO, and then the rest are nice “benefits” to have. They don’t sit and do the math to figure out what their total compensation is. During a job hunt, they don’t realize that a job with a lower base pay may actually have higher total compensation than a job with higher base pay, but lower benefits. 

This has become a giant misunderstanding. 

For example, let’s say Jennifer gets two job offers:

Offer #1

Area 51 gives her an offer letter with a base pay of $60k, 15 vacation days, comprehensive Medical, Dental, and Life Insurance, disability, and a retirement plan.

Offer #2

Fred’s Stuffed Possum Emporium gives her an offer letter with a base pay of $55k, 15 vacation days, comprehensive Medical, Dental, and Life Insurance, disability, and a retirement plan.

Based on the two offers, it looks like Area 51 is a layup, but their retirement plan is employee contributions only. Also, the insurance plans (which cost a total of $20k) are 50% employee paid.

Fred’s will match 5% of base pay towards the retirement plan and pays 100% of the insurance plans (which for the sake of simplicity, we’ll assume are the same as Area 51’s).

So let’s break down each offer into what everyone understands – dollar bills:

Offer #1 Breakdown

$60k base pay + $10k insurance + $3,460 PTO = $73,460 Total Compensation

Offer #2 Breakdown

$55k base pay + $20k insurance + $2,750 retirement plan match + $3,175 PTO = $80,925 Total Compensation

So if you break it down, Fred’s offer is Jennifer’s best bet for total compensation. Now, whether being around stuffed possums all day would creep her out is another consideration entirely and outside the scope of this article. Yet, without a detailed understanding of the benefits, she would most likely go with Area 51’s offer.

Why Don’t Potential Hires Ask for Clarification on Total Compensation?

Quite frankly, it’s uncomfortable.

Imagine sitting in an office filled with stuffed possums staring at you and having to negotiate with someone you just met. The stuffed possums alone would make most of us feel a little out of our comfort zone, now add in a job interview with a complete stranger. 

But the reason isn’t as important as the fact that your candidates, generally, won’t ask so it may be beneficial for all parties if the company takes the lead in laying it out. 

What Can Companies Do to Showcase Their Total Compensation Packages?

Explaining it at some point in the interview process is an option, but seeing it on paper or a screen is generally more helpful for people. One thing that companies can do is provide statements that showcase the complete compensation package broken down. 

In Jennifer’s case, here’s what the two offers would look like with total compensation statements.

Offer #1 Statement of Compensation

Offer #2 Statement of Compensation

General statements would more likely not show the actual figures and provide links to rate tables for the insurance offerings. For example, Fred’s statement might look like this: 

What About Current Employees?

You can issue annual or quarterly statements to show current employees their total compensation, like the examples above. Additionally, some firms have portals that employees can access at any time to see their total compensation. 

Are General or Specific Compensation Statements Better?

From an employee’s perspective, a specific compensation statement is more helpful. From a company’s perspective, there are a few considerations to determine which one is best for you. First, there’s a cost associated with the statements. If you do them, there will be labor costs that go into producing these statements. If outsourced, there will be a hard dollar cost, with specific compensation statements costing more than general statements. 

Additionally, there is a higher chance of error with specific compensation statements. And without knowing what coverages they may take, it will be impossible to show a potential new hire the exact compensation for insurance. 

The Bottom Line

Many potential new hires and current employees don’t have an understanding of what employers offer beyond their base pay. It’s your responsibility to communicate the value of your total compensation package with them. Providing an easy-to-understand Total Compensation Statement may help them see a more holistic picture of the value you are offering. 

If you have any questions, we’d be happy to help. You can reach me or another Odyssey consultant by dropping us a message here.

The post The Biggest Misunderstanding About Employee Compensation and How to Fix It appeared first on Odyssey Advisors, Inc.

Bottom Line Up Front

• Profit-sharing plans are defined contribution retirement plans that permit employers to contribute discretionary amounts in order to provide employees with a share of the company’s earnings.
• 401(k) plans can be added as a feature or subset of a profit-sharing plan in order to allow employee contributions.
• There are three types of profit-sharing plans: new comparability, age-weighted, and pro rata.

Share in the success of your business with your employees and they’ll adopt a greater sense of ownership in the work they produce ultimately leading to greater productivity and employee loyalty. 

When it comes to sharing your company’s success with your employees, what comes to mind? Stock options? Bonuses?

Before you jump on either of those, let’s chat about profit-sharing plans. 

What are profit-sharing plans?

Despite the name, your business doesn’t need to make a profit to adopt a profit-sharing plan. They should probably think about renaming them. So, what exactly is a profit-sharing plan?

A profit-sharing plan is a type of defined contribution plan that allows employers to make discretionary contributions to their employees’ retirement accounts based on the company’s earnings. 

This type of plan is popular because it provides benefits for both you (the employer) and your employees. Contributions are usually made based on the company’s quarterly or annual earnings, hence the name. The actual amount is determined by the employer and varies on an annual basis.  

Is a profit-sharing plan the same as a 401(k)?

No, a 401(k) plan is actually a feature or a subset of a profit-sharing plan. So they are related but accomplish different purposes. The biggest difference between these two plans is an employer’s flexibility when making contributions to their employees’ accounts.

With a typical 401(k) plan, the employees may contribute to their own accounts. Some 401(k) plans include an employer match where they will match their employees’ contributions up to a certain percentage. 

With a profit-sharing plan, only employer contributions are allowed. The IRS notes that you will need to have a defined formula (this may be discretionary and change year-to-year) that determines how contributions are divided among the plan’s participants. 

How does a 401(k) profit-sharing plan work?

A 401(k) profit-sharing plan allows both employees and employers to make discretionary contributions. As noted above, a profit-sharing plan by itself does not allow employees to make their own contributions which is why most employers will pair a profit-sharing plan with a 401(k) plan. 

These plans provide the employer the opportunity to make bonus contributions to their employee’s retirement accounts. The amount may be the same for all employees (dollar amount or a percentage of pay) or it may vary by participant or job class. A profit share contribution is generally discretionary, which means certain years may have a higher contribution, while others may have a lower contribution or no contribution at all. The amount you contribute is completely up to you as long as you are following a set formula. The amounts can range from $0 to the maximum contribution limits set by the IRS: 

The annual additions paid to a participant’s account cannot exceed the lesser of: 

• 100% of a participant’s compensation, or 
• $66,000 ($73,500 including catch-up contributions) for 2023

Types of profit-sharing plans

There are three primary types of profit-sharing plans: 

• New Comparability 401(k) profit sharing
• Age-Weighted profit-sharing plans
• Pro-rata plans

New Comparability 401(k) Profit-Sharing Plan

A new comparability plan is a type of defined contribution profit-sharing plan that allows for more flexibility with contributions. Employers who use this plan can increase contributions for specific employees (typically older, key employees). Rather than strictly following a percentage of compensation formula, employers can divide their employees into different groups (often by job classification) and then have different allocation amounts for each group. 

These plans do require nondiscrimination testing to ensure that the benefits provided do not overly favor highly compensated employees (“HCEs”). 

Age Weighted Profit-Sharing Plan

An age-weighted profit-sharing plan allocates contributions based on the employee’s age and compensation. The older the participant the fewer years until retirement so the higher their contribution. If properly designed, this plan meets a “safe harbor”, meaning that it will pass automatic nondiscrimination testing because older employees have less time to grow their contributions until retirement. 

Pro-Rata Profit-Sharing Plan

Pro-rata plans are the most common profit-sharing plans because they are the easiest to manage. The contribution is either a flat dollar amount or a percentage of the employee’s compensation. To illustrate, let’s say that an employer has set their percentage at 5% so each participant would receive a profit-sharing amount that equates to 5% of their compensation (this compensation is limited by an indexed IRS annual compensation cap).  

What are the benefits of a profit-sharing plan?

• It builds your employees’ sense of ownership and loyalty. Profit-sharing plans allow employees to share in the success of the company. This leads to a gained sense of ownership and loyalty to the company which leads to increased productivity and efficiency
• Helps attract, recruit, and retain top employees
• The contributions are tax-deductible
• Annual employer contributions are flexible

Does a profit-sharing plan have any disadvantages?

• It may cause a shift in employee focus. Sometimes it can cause employees to start prioritizing profits over quality
• Contributions cannot be made based on performance. This means that employees who contribute less will receive a similar contribution as their higher-performing peers
• Eventually, some employees may view it as a regular entitlement rather than a motivational incentive

How are profit-sharing plans taxed?

Let’s break this one down based on contributions, earnings, and distributions (or withdrawals). 

Contributions and earnings

Any contributions or earnings made on the investments in the accounts are considered tax-deferred. These contributions are tax-deductible for the plan sponsor making them a great benefit for growing companies. 

Federal and state governments will not tax the contributions or earnings until they are distributed. Certain state governments will treat all or a portion of the retirement income as non-taxable so it’s important to review your state’s taxation policy. 

Typically, you will pay the taxes when you withdraw from the account in the future. 

Distributions or Withdrawals

Anytime a withdrawal is made from a profit-sharing plan, it must be reported on the participant’s individual tax return. Any distributions or withdrawals from the account are considered taxable income. 

If you’d like to schedule a free consultation to discuss your retirement plan options with an Odyssey Advisors consultant, you can reach us here. No worries if you’re not ready for a consultation! Feel free to leave us your questions, comments, or concerns in the form below.

The post What are Profit-Sharing Plans? appeared first on Odyssey Advisors, Inc.

Bottom Line Up Front

• Employee benefits are the additional perks, either tangible or intangible, that an organization offers on top of an employee’s salary as part of their total compensation package.
• Organizations are using these benefits to retain current employees, attract new talent, mitigate taxes, and increase morale.
• The most sought-after benefits in 2021 include increased healthcare, remote/flexible work options, childcare, and family benefits, and additional lifestyle benefits.

What are Employee Benefits?

Let’s start this from the top and define exactly what an employee benefits package is. Employee benefits packages are the additional perks, either tangible or intangible, that an organization offers on top of an employee’s salary.

Think back to when you were between the ages of 21 and 25 years old. That’s right around when you most likely got kicked off of your parent’s health insurance plan. For most of us, that was the first time you had to take a step back and look at your employer’s benefits package without the rose-colored glasses on.

The benefits offered vary from business to business. Some are required by law while others are voluntary. Employee benefits can also be used as a way for organizations to retain current employees, stand out from their competitors when trying to attract new talent, mitigate taxes, and increase morale.

The Basics

Most Commonly Offered Benefits

While some of these benefits are legally required, others are not. Here is a general list of the most common benefits offered in an employee benefits package:

• Health Insurance
• Retirement Savings Plan
• Additional insurance such as life and disability
• PTO for vacation, sick days, and personal days
• Remote/hybrid and flexible schedule options

Your workforce is what drives your business so that’s why many business owners want to offer benefits that will help recruit and retain top talent.

Legally Required Employee Benefits

As an employer in the United States, you’re required to participate in and contribute toward certain employee benefits. The Department of Labor describes these benefits as those that provide workers and their families with a retirement income and medical care, mitigate economic hardship resulting from loss of work and disability, and cover liabilities resulting from workplace injuries and illnesses.

These benefits include:

• Time off to vote, serve on a jury, and perform military service
• Provide worker’s compensation
• Social Security, Medicare, and FICA
• Unemployment insurance
• Family and Medical Leave (FMLA)
  • Private employers with 50 or more employees and all public sector businesses are required to provide a maximum of 12 weeks of unpaid leave in a 12-month period to be used as per the DOL.
• Health insurance
  • This is only required by businesses with 50 or more full-time employees

Voluntary Employee Benefits

Voluntary benefits, also known as supplemental benefits, are those offered by employers, typically used to entice and retain employees, mitigate taxes, and increase overall morale. These benefits can range from additional health coverage including vision and dental to lifestyle benefits or employee perks. They are typically cheaper through an employer since they can get reduced group pricing.

As mentioned above, you aren’t obligated to offer these supplemental benefits, but to stay competitive in the job market and retain your current employees, these benefits have become vital. Another benefit (pun intended) is that these benefits are another way to decrease your payroll taxes and increase job satisfaction.

Below is a list of common voluntary benefits offered today:

• Retirement savings plans (i.e. 401(k), Profit Sharing, 403(b), Cash Balance Plan)
• Hospital indemnity insurance
• Dental & Vision insurance
• Disability insurance
• Gym memberships
• Financial Management services
• Life insurance
• Remote and flexible work schedule
• Pet insurance

The list doesn’t end there.  Organizations are starting to get more creative to stay competitive in the job market and employees are placing greater emphasis on supplemental benefits as they consider changing jobs. One study revealed that 78% of employees say that their benefits packages are just as important as their salaries when it comes to keeping them at their current employer.

Most Valuable Benefits Employees are Looking For in 2022

There are a lot of benefit plans out there so how do you know what your employees will be looking for? Since the pandemic, there has been a momentous shift in how both employees and employers look at benefits.

Many believed that employers would decrease their benefits, but that wasn’t the case. According to a recent study conducted by Unum, employers are wanting to add additional benefit packages to protect their employees after seeing what the pandemic has done. They’ve seen disability, critical illness, and viral/infectious disease coverage as the most frequently listed benefits that businesses were adding because of the pandemic.

According to the Employee Benefit Research Institute’s (EBRI) 2020 Workplace Wellness Survey, seven out of ten employees agreed that they need their employer’s help ensuring they are healthy and financially secure. They also felt that employer-offered benefits contribute to their feelings of financial security.

#1 Health Insurance

The Society for Human Resource Management (SHRM) found that healthcare is consistently ranked as the most important benefit category. They found that Preferred Provider Organization (PPO) plans are the most popular health insurance options, followed by high-deductible health plans (HDHPs).

According to their study in 2019, 85% of employers offer PPO, and 59% percent of employers offer HDHP linked to a health savings account (HSA)/health reimbursement account (HRA).

There are also more voluntary health insurance options that you can offer to supplement your standard health insurance plans such as:

• Accidental death & dismemberment (AD&D)
• Dental & vision
• Hospital indemnity
• Long-term disability
• Short-term disability
• Accident coverage
• Critical illness
• Mental health coverage

When you provide your employees with well-rounded health benefits, it’s been shown that they’ll take fewer sick days, feel more satisfied with their job, and gain a sense of security which leads to more productivity and better profit margins.

#2 Remote and Flexible Work Schedules

Before the pandemic, remote and flexible work schedules were heard throughout the grapevine, but no one put much thought into it. It was similar to the gossip of a 4-day workweek. You’d hear about it from a friend of a friend or come across a news article about some progressive company testing the waters, but it was this far-fetched idea.

Now, most employees have gotten a taste of it as states issued stay-at-home orders during the pandemic. As the country is opening back up, more employees are requesting that remote and flexible work schedules become the norm.

According to a study conducted by Mercer, 87% of employers say they will embrace greater flexibility post-pandemic – with most planning to maintain the hybrid model of onsite/work-from-home options. It’s important to note that not all of these options are feasible for every organization. If you’re considering remote or flexible work options, make sure to assess your organizational needs along with your employees’ needs to determine if there’s a reasonable option that works for both parties.

#3 Childcare and family benefits

Many working parents juggled jobs and childcare during the pandemic. When schools closed and classes became virtual, many had to pivot when and where they worked or take a leave of absence to stay home with their children. Data gathered by Pew Research showed that almost double the number of women vice men quit the labor force in the first year of the pandemic. 2.4 million women and 1.8 million men left the workforce between February 2020 and February 2021.

Many organizations noticed this trend and have responded by increasing childcare and family benefits to mitigate the loss of skilled employees. Some of these benefits include:

• Backup care
• On-Site child care
• Eldercare
• Flexible Schedules
• Flexible childcare spending accounts
• Childcare subsidies
• Additional paid parental leave

#4 Lifestyle Benefits

Lifestyle benefits, also known as employee perks, are non-salary-related benefits that are given to employees to improve their lifestyles. Unless you’ve been living under a rock, you’ve heard about Google’s infamous employee perks. Things like free gourmet food and snacks, being able to bring your pets to the office, massage credits, extended maternal and paternal leave, increased death benefits for spouses, free fitness classes, gym memberships – and the list goes on.

These benefits provide employers an edge in how they differentiate themselves from competitors in the job market. They’ve also been proven to increase employee engagement, retention, and satisfaction. They provide a way to personalize your organization’s employee experience.

How to Showcase Your Employee Benefits Package

Share your policies, perks, and procedures when you’re interviewing a new candidate. When you make a job offer, add the benefits to the offer letter as part of their total compensation package. This is a great way to showcase the complete value of what you’re offering. Yes, you can include numbers! You can even do this with your current employees on an annual basis. Include everything that is part of your compensation package – health insurance, dental, salary, paid leave, retirement benefits, flexible spending accounts, etc.

Snap a picture of everyone sitting down for lunch together that you provided and share it on your LinkedIn, incorporate direct quotes or short videos from your employees about the support these benefits bring them whether that’s through their personal goals, their health, being able to care for loved ones without worrying about their job, etc. Everyone loves a good story and this is the perfect way to showcase your company culture and the benefits of working there.

Conclusion

Recruiting and retaining top talent requires a competitive, top-tier benefits package, more so now than ever before. Make sure your employee benefits are meeting your employees’ basic needs and then ask them what they would like to see more of. An anonymous survey is a great way to give your employees a safe space to open up. Do your research on the market, look at what your competitors are offering, and take into account what your employees would like.

Benefits shouldn’t be viewed as another expenditure – rather, think of them as an insurance policy for your business and your employees. With the pandemic (mostly) behind us and the increasing pressure from the great resignation, now is the time to start reevaluating the benefits you already offer.

If you have any questions or need further information, please reach out to one of our Odyssey consultants. We’d be happy to help.

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