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Retirement Plans for Small Businesses

Offering these options will benefit both you and your employees

It’s never too late — or early — to start saving for retirement. According to the United States Department of Labor, experts estimate that Americans will need 70 to 90 percent of their pre-retirement income to maintain their standard of living when they stop working. As a small business owner and employer, your role is of huge importance in helping your workers and yourself become successful in planning for retirement.

There are many options available for your suggestion. These plans will not only prepare you and your employees for the future, but they’re also selling points to help you, the small business owner, attract and retain qualified employees, as well as offer tax savings to your company.

401(k) Plans. This, the most widely known retirement product on the market, allows a business owner and employees to make tax-deferred contributions consistently over the length of their careers. While consistent, these plans are also the most flexible.

“401(k)s not only offer higher contribution limits than most other plan options, but also offer more choices in design to manage business costs and program saving goals,” said Forbes contributor Stuart Robertson.

Employers also have the option in matching employee contributions, which may be nice for the workers, but not mandatory for struggling bosses. Contribution percentages vary based on the desires of the individuals. These plans also allow for penalty-free access to the funds via a loan if an emergency should arise, and allow for catch-up contributions after the age of 50. There are different types of 401(k)s, as referenced below, but prototype plans are available to greatly lessen the administrative burden on small business owners to establish and maintain these plans.

  • Roth 401(k). As Robertson noted, these versions are better for small businesses and employees that may fear higher tax rates down the road. The Roth 401(k) funds are taxed up front, making withdrawals tax-free during retirement.
     
  • Solo (Individual) 401(k). This option is best for a self-employed individual,as you can contribute both as an employee and an employer. “You can cap your contributions as an employee and then have your business contribute up to 20 percent of your total earnings,” stated U.S. News and World Report. Furthermore, contributions can change each year and they are tax-deductible for the business, but they are slightly more complicated and expensive and require benefit reporting annually.
     
  • Automatic Enrollment 401(k). Like the name suggests, employees are automatically enrolled in this plan and contributions are deducted from their paychecks, unless they opt out upon receiving notice of their impending enrollment. Default contribution rates that can rise incrementally over time, and default investment options ease the burden of choosing for employees and the burden of liability in investment results for the employer. As noted by the U.S. Department of Labor, “This plan is best for employers who want a high level of participation, and who have highly-compensated employees whose contributions might be limited under a traditional 401(k) plan.”
     
  • SafeHarbor401(k). Similar to an auto-enrollment plan, safe harbor plans encourage employee participation and eliminate traditional 401(k) testing for employers. Also best for highly compensated workers, “a safe harbor 401(k) plan allows employees to contribute a percentage of their salary each paycheck and requires employer contributions,” according to the U.S.D.O.L.  

Simplified Employee Pensions (SEPs). SEP plansare very simple to begin, with low start-up and operating costs, and are very low-maintenance. They are 100 percent funded by the employer and allow Individual Retirement Accounts to be set up for themselves and each of the employees. The employer must contribute a uniform percentage of pay to each employee, with a limit of the lesser of 25 percent of pay or a dollar amount indexed for inflation (that amount was $50,000 in 2012, $51, 000 in 2013 and is now $52,000 in 2014). This amount can change each year based on the conditions of the business, making flexibility a key selling point.

SEPs don’t offer loan options, profit-sharing options or catch-up contributions like 401(k) plans do, but other than that and the lack of contributions from the employees themselves, they are very similar in nature to 401(k)s. SEPs are best used when you have only a few employees, and the contributions are tax deductible as business expenses. These plans can be good motivation for workers, as the more hard work put in, the more the business profits and the more that can be contributed to retirement savings.

SIMPLE IRA Plans. Also telling from the name, the SIMPLE plan is an easy, affordable option. While it actually stands for Savings Incentive Match Plan for Employees, it’s a solid retirement plan that is suitable for most small businesses. Open to employers with 100 or fewer employees, this plan allows a percentage of each employee paycheck to be contributed, with mandatory employer contributions of either a matched amount or a fixed two percent to all eligible employees (not just those enrolled).

SIMPLE IRAs are great because employees can set up their own plans, as they are very easy to do, and then they keep control. These plans are also nice for employers because they avoid IRS tests and reporting, but they don’t have Roth or loan options, monetary limits are more inconvenient and big penalties may apply if you withdraw early.

Other retirement plans are out there, but the above selections are the best choices for small businesses. When selecting, remember to consider your personal goals and also those for your business. What would happen if your business grows? Would your current choice still be the best option? Be a smart consumer and consult a tax professional before making any final decisions.


Includes copyrighted material of IMakeNews, Inc. and its suppliers. All content contained in this newsletter is for informational purposes only and should not be relied upon to make any financial, accounting, tax, legal or other related decisions. Each person must consider his or her objectives, risk tolerances and level of comfort when making financial decisions and should consult a competent professional advisor prior to making any such decisions. Any opinions expressed through the content in this newsletter are the opinions of the particular author only.

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