Choosing a Retirement Plan for Your Business
Small businesses, and their owners, have many retirement plan options. Choosing the right plan, or a combination of plans can be helpful as a part of running the business and helpful to the owner for his or her retirement planning. The rules can get complex and you should consult with a retirement plan professional as part of the decision-making process. This guideline provides some basic information and can help make the discussions with the professional more effective.
Why have a plan?
For the owner, a qualified retirement plan can be an advantageous way to accumulate wealth. Contributions to the plan can be tax-deductible, earnings within the plan are tax-deferred and there can be flexible ways to take distributions from the plan.
For the business, providing a retirement plan can be a part of the total employee compensation package. The right plan can help attract, retain and motivate your employees.
How much does it have to cost?
Your cost for a retirement plan will take two forms – company contributions to the plan on behalf of employees and yourself and the cost of establishing and administering the plan. The chart below describes some of the funding features of different types of plans. Choosing a plan that allows for employee deferrals without requiring significant company contributions may be the option that provides the best of two worlds – permits the accumulation of larger amounts of money and keeps the company cost low.
The administrative costs of plans vary. Some plans are as simple as employees having IRA accounts to receive contributions, while others require annual IRS filings and audits. Be sure to discuss administrative costs with your service provider and investigate what provider can provide the services you need at the lowest cost.
How much responsibility do you as the manager want?
Once the money is contributed to a plan it must be managed and someone must make the investment decisions. This may mean the trustee of the plan must make investment decisions (or choose investment managers) or having a plan that enables each participant to manage their own funds. More and more plans are going this “self-directed” route.
Brief summary of plan types
| Features | SEP-IRA | KEOGH | SIMPLE-IRA | 401(k) |
| Eligibility | Self-employed individuals, business owners, those with self-employment income | Self-employed individuals, business owners, those with self-employment income | Businesses with 100 or fewer employees not offering other retirement plans | Any public or private company. Usually for companies with more than 25 employees |
| Advantage | Easy to set up and maintain | Highest contribution limits | Salary reduction with lower administration | More features like vesting and loan provisions |
| Contribution source(s) | Employer only | Usually, the employer only | Employee wage deferral and employer contributions | Mostly, employee wage deferral and optional company contributions |
| Annual contribution limits | Up to 25% of compensation, with a maximum of $57,000 for 2020. | Up to 25% of compensation, with a maximum of $57,000 for 2020. | Employee: Up to 100% of wages, $13,500, and up to $16,500 if age 50 or over for 2020.
Employer: EITHER, match employee contributions up to 3% of wages (maximum of $13,000 for 2020); OR, 2% of employee’s wages to $5,600 for 2020. |
Employee: Could be up to 25% of wages up to $19,500 and up to $26,000 if age 50 or over for 2020.
Employer: Up to 25% of wages, up to combined (employee and employer) maximum of $56,000 and up to $62,000 if age 50 or over for 2020. |
| Vesting | Immediate | Vesting schedules are possible | Employer and employee amounts are immediately vested | Employee amounts are vested immediately. Employer amounts can be subject to vesting schedules |
| Administrative Issues | No employer filings required | Form 5500 | No employer filings required | Form 5500 and special discrimination testing required |
Summary
The right retirement plan can serve many purposes. Be sure to investigate all the possibilities to make sure your plan accomplishes what you want. The services of a qualified retirement plan specialist can be very valuable in reviewing your options.
