Choosing the Right Retirement Plan for a Small Business
BY: Jeff Supple
Establishing the ideal retirement plan for a small business can be a somewhat daunting tasks, especially since this is beyond the area of expertise of most business owners. Even if an owner has some in-house help it usually isn’t in the form of a full-time human resources specialist with an employee benefits background.
Where to start?
Employers in most cases want to start with a qualified plan which offers tax advantages to the employer and their employees.
- A plan is deemed qualified by meeting the requirements laid out in Section 401(a) of the tax code.
- Qualified plans must not discriminate (i.e. pick and choose who you want to benefit), have contribution limits and have plan document in place.
What type of qualified plan?
A good start is prioritizing the reasons you are setting up the plan and the goals you have with the plan:
- Tool for attracting quality employees (growing importance in a low-unemployment environment)
- Employee retention tool
- Maximizing your own contributions for retirement
- Limiting eligibility to full-time, longer-term employees
- Tax break for the business
- Flexibility in the amount and frequency of contributions
- Limiting fiduciary responsibility
- Controlling overall cost of administering the plan
- Wanting to encourage employees to save their own money in the plan
Also, as much as possible, you want to want to look at the makeup of your employees currently as well as one year from now, five years, etc.
Prioritizing and answering key questions will lead you into to the right type of plan.
Below are just a few examples and some features:
SEP IRA (Simplified Employee Pension)
- Employer-only contributions
- No annual tax filing or administration required
- Employer contributions are discretionary
- Can establish and fund up until your tax filing date
SIMPLE IRA
- Employee and employer contributions
- No vesting requirements allowed (good for employees, bad as a retention tool)
- Employer contributions are mandatory with limited flexibility
- No annual tax filing or administration required
401(k)/Profit Sharing Plan
- Higher degree of flexibility with contribution amounts, frequency and formulas.
- Higher employee contribution limits
- Ability to design a vesting schedule for retention purposes
- Fiduciary liability
- Tax filing and administrative requirements (adding additional cost)
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