June 14, 2018
Unbiased Financial Information Provided by Financial Finesse
You want to provide a retirement plan -- your employees want to save for retirement and you do, too. Everyone wins with tax-deductible contributions and tax deferral of earnings. But there are so many plans out there - how do you choose which one is right for your business?
Retirement Plan Eligibility
Every plan has certain eligibility requirements. Consult the following chart to determine which plans are available to your business.
|Retirement Plans||Type of Business Ownership|
|SEP-IRA Keogh/HR 10 plans||Any self-employed individual, business owner of any unincorporated or incorporated business|
|401(k) for self employed||Any of the above that have no employees (other than spouse)|
|Simple-IRA||Businesses with 100 or fewer employees who earned at least $5,000 in the preceding year and no other retirement plan|
|401(k)||Any type of public or private company|
Small Business Retirement Plans
A Simplified Employee Pension Plan is available even if you're already covered by a retirement plan at your full-time job.
- You may contribute up to 25 percent of compensation, to $54,000 for 2017.
- No annual contribution is required.
- Only the employer may contribute to the SEP-IRA.
- No IRS filing required - easiest of all plans to establish and maintain.
Savings Incentive Match Plan for Employees (SIMPLE) retirement plans are available as either IRAs or 401(k)s.
- Annual contributions are required.
- Generally, the employer, must contribute either: match employee contributions dollar-for-dollar up to three percent of salary OR make a fixed contribution of two percent of salary
- Employer contributions are 100 percent vested immediately.
- Unlike SIMPLE IRAs, SIMPLE 401(k)s may offer loans, without having to conduct discrimination or top-heavy testing like regular 401(k)s.
- Easy to create - low maintenance fees.
Keoghs are also called HR 10 plans. Three types of plans are available: Profit Sharing, Money Purchase, and Paired (a combination of the first two types).
- Profit Sharing Plans allow you to vary the contribution percentage each year. May contribute up to 100 percent of pay each year, not to exceed $54,000.
- Money Purchase Plans allow you to contribute up to 100 percent of pay (not to exceed $54,000), but you must contribute the same fixed percentage every year.
- Only the employer contributes to the plans.
- Profit Sharing benefits businesses whose income varies because no annual contribution is required.
- Money Purchase is ideal for businesses with stable income that can easily contribute a fixed percentage each year.
- Keogh/HR 10 plans offer higher contribution limits than most other plans.
While more complex and costly to administer, 401(k) plans offer popular features, such as vesting schedules and loans. There is no required employer contribution. The IRS requires certain forms for set-up and annual reporting and testing.
- Generally, employees can defer up to 100 percent of annual compensation to a maximum of $18,000 in 2017 ($24,000 if age 50 or over).
- Employer contributions can vary year to year and are optional - up to 25 percent of compensation, to a maximum of $54,000 for 2017.
- 401(k) Plans offer the most employee options and benefits.
A 401(k) for self-employed individuals was introduced in 2002. If you have no employees (other than your spouse), you may create a 401(k) that permits you to take salary deferrals as described above, as well as make an employer contribution of 25% of pay. The total combined contributions (employee salary deferral plus employer contribution) cannot exceed $54,000.
So with all these choices, what makes sense for you? Take some time to decide what you want a plan to do. Are you trying to make the highest possible contribution for yourself? Do you want to minimize expenses? Is employee retention your biggest concern? Your goals and your company structure will determine the best plan for your business.
It may be smart to get recommendations from an employee benefits consultant, as well as a retirement plan specialist. Many small businesses choose a mutual fund company for their retirement plan needs. Or you can work with a financial advisor or broker. Any of these can provide you with the paperwork to establish the best retirement plan for your business. IRS Publication 560 provides the most updated tax information on small business retirement plans.