Starting a Small Business Retirement Plan

Starting a retirement plan for your business can have positive tax and savings impacts for both employers and employees.  Choosing the type of plan that best suits your business will depend on the size of your business, and the amount you would like to save annually.  Let’s take a look at the 3 most common small business retirement plans, and how they work:

Simplified Employee Pension (SEP) IRA – The SEP IRA allows a business owner to save 25% of their gross compensation (or 20% of self-employment income) up to $56,000 pre-tax for 2019.  If the business owner has employees, they are required to make contributions to employee’s accounts in the exact percentage that was made to their own account.

SEP IRAs make great savings vehicles for sole proprietors or small family businesses.  They also make attractive vehicles for those with a side business to supplement a full-time career as an individual can contribute to both a 401k and SEP IRA concurrently.

SIMPLE IRA – For businesses with under 100 employees, the SIMPLE IRA can be a great solution.  An employer and their employees can contribute a maximum of $13,000 pre-tax in 2019.  The employer must also make a contribution to all eligible employees in the amount of 2% across the board, or a dollar for dollar match up to 3%.  This includes the employer’s own account so they also match their own contributions.

The SIMPLE IRA is easy to operate from an administrative perspective, and provides a solid retirement offering for both the employer and employee.

401(k) – An employer with more than 100 employees that would like to offer a retirement benefit will have to use the 401(k) plan.  These plans come in all sorts of variations, are subject to nondiscrimination testing, and require heavy lifting administratively to run correctly.

Nondiscrimination testing is complex, and requires that owners, key employees, and officers not benefit from the plan unfairly as compared to rank and file employees.

Administratively, employers are required to provide due diligence on investment options, plan costs, employee education, timely contributions, and various other compliance requirements from the DOL and IRS.

The 401(k) is also the highest cost retirement plan as the employer will partner with various service providers to properly administer the plan.  All of this said, the 401(k) has become a staple in retirement savings for millions of employers and employees around the country, and utilized a primary bucket for retirement savings.

Subject to plan testing, employers and employees can contribute up to $19,000 pre-tax or roth in 2019.  They can also structure their plan to provide an employee match, and/or a contribution across the board to all eligible employees.  If structured properly, a business owner could hypothetically contribute up to $56,000 in both employee and employer contributions to a 401(k) plan for 2019.

As a general rule of thumb, SEP IRAs work great for sole proprietors and those with a solo side business.  SIMPLE IRAs can be ideal for small businesses under 50 employees that do not expect to significantly growth their employee population.  Over 50 employees and/or growing may look towards the 401(k) as the best option for the business.

I hope this article was helpful, if you have any questions on what may be the best solution for your small business, please contact the office to discuss the options in greater detail.