Retirement Plan Setup (401k, SEP-IRA, Simple IRA, etc) for business/employees - Help Needed

Finance Tax
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I’m looking for advice regarding how to set up retirement plans for my business so I can defer as much taxes as possible.

Spouse and I co-own the S-Corp.
We started over 2 years ago, but only started getting revenue and hiring employees in the last 12 months.
We have about 20 employees, but are actively hiring and may have about 30 employees by year’s end.
Most are paid about $20/hr, but a few are at about $30/hr, and a couple at $45/hr. Most are working 20-40 hrs/week.
We expect income (EBITDA) to be about $500,000 this year and possibly $1,000,000 next year, before we take any salary.

I have spoken with Fidelity and they offered 3 options: SEP-IRA, Simple IRA, and 401k.

Below are some notes from my phone call.
SEP-IRA
SEP IRA - Simplified Employee Pension Plan | Fidelity
Allows 25% of comp up to $58,000
Employer only contributions (eg 25% for self and 25% employees)
Must be same % for all employees
Can add on eligibility reqs - can be based on yrs (eg 3 of last 5 years)
Year-to-year plan. Don’t have to contribute every year, unlike 401K.

Simple IRA
Simple IRA
Like “baby 401k”
Deferrals and Employer matches
Lower limits
Salary deferral up to $13,500. $ for $ match anywhere from 1% up to 3%. Must be 3% 3 of every 5 years.
Eligibility Reqs - based on $ earned. Can limit if employee earns <$5000 in any previous 2 years. or not expected to $5000 in current year.

401k
I was only given the link for this info.

My ultimate goal is to have the most money at the end of the day. I also would like to keep my employees happy. I’m not sure how many would be interested in or contribute to any of these plans. Most of my employees are on the younger side and probably less likely to be saving much.

All of these plans seem to have some major drawbacks for me as an employer.

Drawbacks
SEP-IRA - If my corporation contribute 25% of my paycheck, the corporation has to give all employees 25%.
Simple-IRA - Can only defer $13,500.
401K - Limited to $19,500 and there are a lot of fees. Investment choices are limited.

I’m comparing this all to my last S-Corp in which I had a Self-Employed 401k Plan from Fidelity with Fidelity and my spouse and I were able to defer a lot more (up to $58,000/person for 2021) at no cost with infinite investment choices. Now, it’s a lot more expensive to do so.

One thought is to create another corporation in which only my spouse and I are employees. This new corporation gets paid by the current corporation for its services. Now, my spouse and I are the only employees, so we can do the Self-Employed 401k. I’m sure this runs afoul of some law.

Any advice as to which company to use to administer the retirement plan and how to structure it to maximize the amount of money we can defer at the lowest cost possible is greatly appreciated. I would like to hear from any others who have their own businesses and have administered retirement plans.

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401k’s are the best of those choices, but as you see, they have issues when there are additional employees. The limits aren’t $19k - those are elective deferrals, but you can still do both an employer match/contribution as well as potentially employee after-tax, non-Roth contributions as well up to the $58k combined max per person, per independent employer.

The downsides are they cost a bit more to admin and they have participation limits where they can’t have the higher income employees putting in a lot more (“top heavy”) unless they meet some safe harbor test like giving out a decent match to all employees.

Yes, probably so. There are rules about controlled companies and affiliated companies that make it harder to split off the high paid employees and give them better benefits than the rank and file.

But if you’re really looking to save a lot, especially pretax, you might want to look at deferred comp plans.

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Thanks for the comments. I’m going to do a bit more research into the 401k.

I’m disappointed that I can’t defer as large a percentage of my income as I used to with the self-employed 401k.

I did a rough calculation that income after $500,000 will be taxed at about 50% (I’m in a high tax state). I’m grateful that our business is so successful and this is the first time in our lives making anywhere near this amount, but I have no idea how to shelter/defer taxes on this money. I know that real estate has some beneficial tax treatment and I will look into the advantages of buying some income property soon.

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After you’ve contributed what you can to a retirement plan, you pay yourself a “reasonable salary” (whatever that means or whatever is required for the retirement contributions), then take the rest as a dividend, which should be taxed at preferred rates. Or so I hear.

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Depends on your AGI. The only tax benefit I know is the Passive Activity Loss, which allows you to deduct up to 25K/yr in rental losses (which includes depreciation) from regular income. But this deduction phases out between 100K-150K of AGI (same number for single or MFJ returns, so a divorce could help a bit here). If your business becomes passive (you stop being involved in it), or you own other businesses that produce passive income then I think there’s no limit to offsetting passive income with passive losses.

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It is my understanding that 401k limits are “per business.” Would it be possible to own 2 separate LLCs that each allow up to 58k in contributions?

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See the link above about related employers. You could own a little of each LLC, but if you own more than that, they’re probably going to be “related” (depending on who else owns them and how much etc).

Annual additions limits are restricted to one limit ($57,000 for 2020) for all related employers treated as a single employer.

Elective deferrals are per person, not per business, regardless.

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