Retirement Plans for Small Business

Small businesses are very complex and business owners wear many hats while trying to maintain and grow their business.  There are many human resources management issues that need to be handled.  Thinking through the right retirement plan for your organization can be a complicated and sometimes time consuming process.

So why do small business owners choose to provide retirement benefits to their employees?

1.  It can provide a tax benefit;
2. Having a retirement plan can be part of a comprehensive compensation package that can help to attract and retain employees.

There are several options in choosing a retirement plan and options should be customized to the organization’s particular needs.

So what are the different retirement plan options?

The most popular retirement plans are 401(k) plans, IRA, SEP, SIMPLE, and for nonprofit organizations, 403(b) plans are available.

401(k) plans

One of the most recognizable plans is the 401(k) plans.  Many organizations offer this type of plan as a benefit to employees because it has been a good option for retirement savings and financial security.   Employees are able to contribute a portion of their salary to the plan, either as pre-tax or after-tax, contribution.

Some employers offer matching programs to incent their employees to participate.  There are several plan options to choose from.

Individual Retirement Arrangement (IRA)

IRAs (what is an IRA?) are offered by banks and financial institutions and allow employees to save money for retirement.   IRAs are most popular with sole proprietors and some plans offer employee contributions by payroll deduction.

There are two types of IRAs: Traditional and Roth.

Traditional IRAs are considered one of the easier retirement plans and is based on the participant’s account balance.  Contributors must be under 70 ½ years old for the tax year and have a taxable income equal to or greater than contributions for the year.  Money is not taxed until it is withdrawn.  Withdrawing from the account cannot be done before the age of 59 1/2 or taxes will be paid plus an additional 10% tax.

Roth IRAs can be set up at any age and earnings can be tax free if certain requirements are met.

Simplified Employee Pension (SEP) Plan

This plan is designed for small business owners and has minimal costs and administrative efforts.  Contributions by the employer are deposited directly into IRAs that are set up for employees by the employer.  This type of plan is only funded by the employer.  Employees are 100% vested in the plan and own all of the money that is contributed to their SEP plan.

Savings Incentive Match Plan for Employees (SIMPLE Plan)

SIMPLE plans are specifically for employers with less than 100 employees who meet certain criteria.  Administrative costs are lower than more complex plans.  Under this SIMPLE IRA plan, contributions are made to IRA plans set up for employees.  Contributions have specific contribution limits.  These plans are ideal for small businesses without retirement plans.

403(b) Plans (for nonprofit organizations)

403(b) retirement plan is available for nonprofit organizations.  Employees contribute to the plan and payments are made pre-tax.  Taxes on contributions are deferred until the money is withdrawn after age 59 1/2.  Retirement income is taxed when withdrawn.  403(b) plans do not have the same administrative difficulties as some other plans.  Salary deferred contributions are not subject to complicated discrimination testing, but to a universal availability, which means all employees must be able to make contributions.

Each plan has slightly different contribution limits and withdraw conditions.  Please consult a licensed Financial Advisor for a plan that meets your organization’s needs.

photo by:  Property#1