Three of the Best Retirement Plans for Small Businesses
Most of us know that a 401(k) plan allows us to contribute to our retirement expenses by giving us a way to grow our money tax-free in the stock market. If you work for a company with such a plan in place for its employees, you contribute part of your salary to your 401(k) account and, ideally, so will your employer. This arrangement is standard for mid and large companies.
Small business owners can be intimidated by the costs and complications associated with traditional 401(k) plans, but it is just as critical for them and their employees to save for retirement. Are there any other options besides the expensive and hard-to-administer 401(k) plans? Yes, here are some alternatives that help smaller businesses benefit from retirement plans.
If you are a solopreneur who does not have any employees, except for maybe a spouse, consider the Solo 401(k) plan, which is also called an individual or one-participant 401(k) plan. Solo 401(k) plans are inexpensive to set up and maintain, and since you’re both the employer and the employee, you can make contributions in both roles and they will all be tax-deductible. Like a traditional 401(k) plan, there are no eligibility restrictions on establishing this plan, a Solo 401(k) plan offers high contribution limits, and it allows for loans and hardship withdrawals.
Some differences from a traditional 401(k) are that the Solo 401(k) only needs to file Form 5500 after the total plan assets exceed $250,000. Also with a Solo 401(k) plan, you can have a designated Roth account, which is a separate account that accepts after-tax employer contributions.
If your business has even one common-law employee, you cannot use the Solo 401(k). For a small business owner with a paid staff, the best option might be the Simplified Employee Pension or SEP IRA. This plan can be used by all types of businesses of any size and does not have any set-up costs.
Contributions to a SEP IRA are made exclusively by the employer. All of these contributions are tax-deductible for the employer and are not included in the employees’ gross income. If you use a SEP IRA, you must contribute to all employees’ accounts equally, whether by using a percentage of their salary or a flat dollar amount for everyone. You must also disclose the amount contributed to an employee’s SEP IRA account on their W-2 form.
But you can also choose not to contribute during any given year since SEP IRA contributions are made at the discretion of the employer. This makes it a good retirement plan for new businesses that might face ups and downs from year to year. With the SEP IRA, you can annually decide whether or not to make contributions, although you must treat all employees the same and cannot contribute to only some accounts.
The biggest drawback with this plan is that all employees must be covered, including part-time and seasonal workers. Another limitation is that the maximum that can be contributed by an employee is $12,500, although there is a $3,000 catch-up contribution allowed if the employee is older than 50. Finally, loans are not permitted from SEP IRA plans.
The third option small business owners can consider is the Savings Incentive Match Plan for Employees of Small Employers, or a SIMPLE IRA. To use this plan, you must have fewer than 100 employees and they all must have earned at least $5,000 during the previous calendar year. Contributions are made by the employee and the employer is required to match them, either with an equal match up to 3% of the employee’s compensation or a flat 2% for each participant. As with the other plans, the employer’s contributions are tax-deductible.
The main drawback to this plan is that employee contributions are not discretionary, meaning that you must match all employee contributions and cannot decide to take a break for a year as with the SEP IRA. Employers cannot maintain any other retirement plan for employees who are eligible to participate in the SIMPLE IRA.
It is more important than ever to save for retirement, and job seekers see these plans as a clear benefit when they consider employers. Considering the high costs and complicated forms required by a traditional 401(k), these are the best options for small businesses. Take care of yourself and your staff by choosing one of these plans and show that you are a business that knows what is important to its employees.