Is your small business ready to offer a retirement plan to your employees? We’re covering three types of employer sponsored retirement plans, so you can start to consider which plan works best for your business.
Determining which retirement plan to set up depends on:
- Your business entity type
- The # of employees
- How much you are willing to spend in maintenance fees
- How much you want to save for you and your employees
Why offer a retirement plan to your employees?
You can use these plans to reduce your tax liability, retain top talent, and save for your future retirement. Your employer contributions are tax deductible as a business expense. This can save you money come tax time! But it’s also about the benefit to your employees. You are not just contributing to your future, you are contributing to theirs.
Discover three different types of employer retirement plans and decide which works best for your business.
SIMPLE IRA (Savings Incentive Match Plan for Employees)
Once employees meet certain requirements, they can contribute money to their simple IRA on a pre-tax basis. The employer must match up to 3% of the employee’s salary or their contribution amount – whichever is less. The current contribution limit for an employee is $12,500.
This retirement plan is the easiest to set up and least costly to maintain. It works best for smaller businesses with less than 100 employees.
Pros: Cheaper than a 401K, don’t require annual 5500 filings
Cons: Lower pre-tax contribution limits, less flexibility with employer contribution, the investment options are limited to single fund families
These are the most popular type of employer retirement plans. The employee can pick the type of investments in their 401K, contribute up to $18,500 a year, and can come with a partial employer contribution match.
This type of retirement plan is better if you want to contribute more to the plan, and if you want the ability to take out loans from the 401Ks. Also, a profit-sharing plan can be added to 401Ks. This could allow even higher contributions.
There are more reporting requirements with 401Ks than Simple IRAs, so they are costlier to maintain.
Pros: Higher contribution limits, more flexible employer contribution matches, greater variety of investment options
Cons: More complex filing requirements, more expensive to maintain
Simplified Employee Pension Plan (SEP or defined benefit plan)
This is an employer-sponsored retirement plan where the employer deposits contributions into the IRA of each participant. The employee has no control over the investment. The employer bases these contributions on annual income and years of service. But you have to keep the same contribution percentages the same for all employees. For example, if you want to contribute 10% of your income to the plan, all of your employees that meet the same income and service requirements get that 10% too.
These defined benefit plans are rare with private businesses because employer contributions are required annually, and they are expensive to maintain and administer. But it also has significant tax benefits in particular situations. You could set up this plan retroactively and take a deduction if you find out you have a large tax liability for the previous year.
Pros: Can set up the plan after December 31st for the previous tax year to take that deduction
Cons: Employer is responsible for entire contribution, which gets expensive
Which plan is best for your business?
Consult your CPA for the best answer. They can evaluate the many nuances of your business and help you set up and run your employer sponsored retirement plan. There are also variances of the IRAs and 401Ks we mentioned above that could work better for your business.
If you have any questions about retirement plan options, leave a comment below!