If you’re a small business owner, you may be struggling with how to best establish retirement plans for your employees. You may be asking yourself—which option offers the lowest costs, the best tax advantages, and the most flexibility? For small business owners, a retirement planning professional can answer these questions and provide other valuable insight regarding coverage that owners may not be aware of. Below is some basic information regarding some of the basic types of retirement plans that are available.
Types of Common Retirement Plans
There are numerous retirement plans available for small businesses. Four of the more common types of retirement plans for small businesses include:
- Simplified Employee Pension Plan (SEP IRA)
- Savings Incentive Match Plan for Employees (SIMPLE IRA)
- Safe Harbor, Simple or Individual 401(k) Plans
- Traditional 401(k) Plan
Selecting the correct plan does require a careful analysis of your business.The best choice will depend upon certain aspects of your business. Some of the most basic factors that will help determine the ideal plan can include:
- Number of employees
- Potential risks your business is or could be exposed to
- Requirements of administering the plan once it is selected
Different Plans Have Different Advantages
Each of the common retirement plans listed above have different advantages. Some typical advantages of retirement plans may include incentives such as: tax-deferred growth, deductions of employer contributions as a business expense, and the possibility of a tax credit for the employer to defray set-up costs for a certain period of time.
However, there is no “one size fits all” retirement plan for every small business. Along with advantages, each type of retirement plan carry other considerations that should be taken into account. For example, some small businesses may decide against a traditional 401(k)s due to the set-up costs and annual fees. While on the other hand, a traditional 401(k) may be the best option for a company that wants its employees to have flexibility when making contributions or for businesses that wish to benefit from a tax deduction. An experienced retirement professional can help to guide small business owners through the selection process so that they end up with a plan that creates value and does not overburden the organization.
Simplified Employee Pension Plan—SEP IRA
A SEP IRA can be a valuable retirement tool for self-employed people or sole proprietors. This is because contributions are made only by the employer. There are caps for contributions that come from salary and net profit—as well as an overall cap. A business owner can change the contribution amount each year, and there is no minimum contribution requirement. It is important to note that if you have employees, they each must receive the same percentage contribution as you do. In some situations this may make an SEP IRA a less economic option.
Additionally, there are no IRS filing requirements for this type of plan and they are relatively simple to set-up/administer. If you are considering a SEP IRA, talk to a retirement plan consultant to determine if this is the best option for your small business retirement plan.
Savings Incentive Match Plan For Employees—SIMPLE IRA
In comparison to a SEP IRA, a SIMPLE IRA is largely funded by employees. An employer is required to contribute to these accounts, with two contribution options: matching contributions up to a certain percentage of the employee’s salary or, a flat contribution, regardless of whether or not an employee deposits funds into the account.
One distinguishing factor of SIMPLE IRA plans is that employee contributions are typically subject to a cap and in many cases, additional contributions are permitted for employees over 50 years in age. For small businesses, a SIMPLE IRA is a great way to start an employee retirement plan. Some benefits of SIMPLE IRA plans are that (in general) there are no IRS filing requirements, there are minimal fees, and it is relatively easy for a business owner to establish.
Safe Harbor, Simple or Individual 401(k) Plans
For small business owners who want more flexibility in contributing to retirement accounts, a non-traditional 401(k) plan is a great alternative. These plans are jointly funded by the employer and the employee, with higher contribution limits than a SIMPLE IRA. When compared to some traditional 401(k) options, these plans can be easier to set up and may be more cost-effective to run.
Safe Harbor Plans
Safe Harbor plans have many similarities to traditional 401(k) plans. A distinguishing factor of Safe Harbor 401(k) plans is that employers are not required to perform the annual ADP or ACP nondiscrimination tests which apply to traditional 401(k) plans, if the plan satisfies all safe harbor requirements as outlined under IRC Section 401(k)(12).
An Individual 401(k) plan can be available to sole proprietors or partners. Similar to other retirement plans, there is an annual limit on the amount of total contributions. A unique component of an Individual 401(k) plan is the option for business owners as a plan participant to borrow against their retirement savings.
A SIMPLE 401(k) plan is generally available to small businesses who have less than 100 employees. SIMPLE 401(k) plans have contribution limits and also allow for employees to take out a loan against their retirement savings.
Always Work With a Professional
Businesses who are considering non-traditional 401(k) options should always consult with a retirement planning professional to ensure that they are able to satisfy IRS requirements and that their organization can support the plan administratively.
Contact The Business Benefits Group Today!
The key to maximizing both time and savings for your small business retirement plan is selecting the right plan that best suits your needs. Contact the Business Benefits Group today by giving us a call or sending us a message online in order to learn more about these different types of retirement plans that we offer.
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