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Four Retirement Plan Options for Your Small Business

May 30, 2017

Retirement plans are a valuable tool when it comes to attracting and retaining the top employees your business needs to compete. While these plans help employees save for retirement, they offer benefits to the employer as well. In addition, most plans are easy to establish and maintain.

If you were to institute an employer-sponsored retirement plan, you could experience the following:

  • Tax-deferred growth on earnings within the plan
  • Current tax savings on individual contributions to the plan
  • Immediate tax deductions for employer contributions
  • Low-cost benefit with a highly perceived value by your employees

There are four plan options that help both you and your employees save including:

SIMPLE: Savings Incentive Match Plan
This plan allows employees to contribute a percentage of their salary and have their employer match their contribution. In 2017, employees can set aside up to $12,500 ($15,500 if they are 50 years of age or older) and their desired amount is payroll deducted.

As the employer, you can either match up to 3 percent of the employees’ pay dollar-for-dollar or make a fixed contribution instead. The fixed amount would be 2 percent of pay for all eligible employees.

You can allow your employees to choose which IRA the contributions are sent to, or you can send them all to one financial institution. Either way, the employee can decide where and how the money will be invested, they keep the account even if they change jobs and their contributions are 100 percent vested.

There is a short form that needs completed to set up this plan. Administration costs are low, and a lot of the paperwork required is completed by the financial institution that handles the plan.

SEP: Simplified Employee Pension Plan
A SEP IRA is a type of individual retirement account employers set up for themselves and their employees. You must contribute a uniform amount to each employee. In 2017, contribution amounts are limited to 25 percent of the employee’s annual pay or $54,000, whichever amount is less. Contributions are not locked in every year, either. You can decide how much to put in each year, which provides you flexibility for varying business conditions.

Costs are low to set-up and administer the plan. Set up is as easy as filling out a short form. Applicable to most employers, SEP plans can be established for the self-employed, too. 

401(k) Plans
A widely-accepted option, 401(k) plans allow employees to put a part of their income into the plan for retirement. Employee contribution limits are slightly higher: $18,000 this year and an additional $6000 for employees age 50 or greater. This contribution is pre-tax, meaning pay is reduced before income tax is calculated.

You can match a certain percentage of the employee’s contribution, which is a great way to increase participation in the plan. 401(k) plans are more complex, but the higher contribution limits allow employees to save more.

Profit-Sharing Plans
Profit-sharing plans are a good option if your business has uncertain or fluctuating profits. The amounts you contribute are unrelated to any amounts an employee may choose to make.

You can contribute anywhere between 0 and 25 percent of eligible employees’ compensation. The maximum allowable amount per employee for 2017 is $54,000. And the contribution amount does not need to be the same for all employees, which allows you to reward key employees with a higher rate.

You can also include options like service requirements, vesting schedules and plan loans as part of this plan; options not available under SEP plans. You are able to combine this plan with a 401(k) plan.

Pension plans can be confusing. Add to that the complexity of the tax implications and most businesses need some guidance through this process. Contact us, and we can help you find the right plan for your business and valued employees. 

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