Easy to Establish Retirement Plans for Small Businesses

What is an effective way to start a retirement savings plan for your company without going broke in the process? What type of funding commitment is involved? How do these plans work? What plan is right for your company?

In order to attract and retain key business talent it is super important to have an excellent benefits package in place. That is why many employers consider retirement plans for small businesses a very important benefit to offer potential superstars that may be the key to helping a business’ profits skyrocket.

There are many types of plans available for employers to set up that provide excellent opportunities to save, but are not back breakers in terms of investments of time or cost to the employer. Retirement plans for small businesses are a key component in helping employees and employers alike build retirement security.

In this blog I’m going to give a brief overview of some of the less expensive, easier to maintain plans that can be established.

We will be discussing:

1. Payroll deduction IRA’s
2. The Simplified Employee Pension or SEP
3. The Simple IRA Plan

The Payroll Deduction IRA

A payroll deduction plan is a voluntary plan that you can set up at your business. It will allow business owners and employees to set aside money in their own IRA accounts for retirement. It costs nothing to establish and is easy to maintain. You can offer a wide variety of investments. There are no government reporting requirements. It gives everyone in the company a chance to pursue their retirement goals in a way that makes it easy to save. Contributions can be a high as $5,000 a year for those under 50 and $6,000 a year for those 50 and older.

The Payroll Deduction IRA

1. Funded through payroll deductions
2. Strictly employee funded
3. No cost to business to establish or maintain
4. No government reporting
5. Anyone can participate
6. Can choose from Traditional IRA or Roth IRA
7. Contributions up to $5,000 if Under age 50, $6,000 if over

The Simplified Employee Pension (SEP)

The Simplified Employee Pension is an employer funded plan. Employer contributions can range from 0% to 25% of compensation. Those employees covered by collective bargaining, or earning less than $550 annually can be excluded. Minimal testing is required.

The Simplified Employee Pension or SEP

1. Flexible contributions made by the employer
2. Tax deductible to the company
3. Contributions can be as high as 25% of compensation
4. No need to file annual Form 5500
5. Immediate vesting of employer contribution

The Simple IRA Plan

The Simple IRA can be established by businesses employing less than 100 employees. It is funded by a combination of employee deferrals and flexible employer contributions. There is minimal paperwork to establish a Simple IRA Plan and minimal paperwork to maintain the plan. Enrollment eligibility is for 60 days following plan establishment, November 2^nd to December 31^st thereafter. There is limited fiduciary responsibility.

The Simple IRA Plan

1. Easy to establish and maintain
2. No need to file annual Form 5500
3. No plan testing required
4. Those earning less than $5,000 in previous 2 years can be excluded
5. Tax deductible employee deferral can be as high as $11,500, $14,000 for those over age 50
6. Multiple employer contribution formulas available – 3% match on those participating is common
7. Employer contributions are tax deductible
8. Immediate vesting of employer contribution

Other Plans?

There are other types of retirement plans available for small businesses too. The Profit Sharing Plan and the 401(k) Plan are the most common. These are excellent plans for retaining employees because employers can implement a plan vesting schedule. A vesting schedule restricts employee ownership of contributions until they have met a pre-determined numbers of years of employment with the company. Employees that leave the company before becoming fully vested are penalized and will lose a portion of their employer contributions made.

 These plans are a bit more cumbersome to maintain because you will need to have a plan administrator to do the necessary filing with the IRS and maintain the plan document to conform to the changes in the tax law. More testing to satisfy plan IRS rules would be necessary too. There is a cost of doing business with the plan administrators. If your budget for the plan can be larger than minimal, you should take a look at these plans too. Yes there are costs involved, but the tradeoff is a higher level of control of plan assets.