A wide array of business retirement plans are available that benefit you at tax time. While the plans vary subtly in the tax benefits they provide, what we’re generally looking at is some combination of tax-deductible contributions, tax-deferred growth, and (in the case of Roth contributions), potential tax-free withdrawals. In order to help you set up your plan, there are tax credits that cover plan startup costs.
There are two broad categories that retirement plans fall into, the defined benefit plan—think pensions—and the defined contribution plan—like a 401(k). The plans discussed here are defined contribution plans, the most common types of plans in the small business market.
There are two main types of defined contribution plans: qualified plans, in which the company sponsors the plan, and IRA-based plans, which the business sets up but the employee or owner contributes to individually.
Another IRA-Based alternative is called a SIMPLE IRA plan (SIMPLE stands for Savings Incentive Match Plan for Employees). Perhaps the best way to describe the SIMPLE IRA plan is as the little brother of the more robust (but more costly) 401(k) plan. Much like the traditional 401(k) plan, the SIMPLE IRA Plan allows for both employer contributions as well as employee salary deferral contributions. Unfortunately, the salary deferral limit for SIMPLE IRA Plans is lower than the salary deferral limit for 401(k) plans (as is the overall, aggregate plan contribution limit).
Nonetheless, the SIMPLE IRA afford employers and employees with many of the same benefits as 401(k) plans, typically at a fraction of the cost.
Feature |
Summary |
Details |
---|---|---|
Employer Eligibility |
No more than 100 employees |
Typically cannot maintain a SIMPLE IRA if business has over 100 employees with compensation over $5,000 |
Maximum Age Restriction |
N/A |
Cannot impose age restriction as with some other types of plans |
Maximum Service Restriction |
2 prior years |
May exclude employees who have not worked for business during at least 2 prior years |
Annual Notifications/Reporting |
Employee Notification |
No federal filing such as Form 5500 Employee notification requirements |
Funding Options |
Employer and Employee |
In addition to employee deferrals, employer must typically contribute 2% (nonelective) or 100% match (up to 3%) |
Maximum Contribution (2016) |
$17,800* $20,800* (age 50+) |
The maximum employee deferral for 2016 is $12,500 ($15,500 for those age 50 or older) |
Special Features |
Simplicity |
Contributions made to SIMPLE IRAs individually maintained by each plan participant |
Withdrawal Restrictions |
No |
Employer cannot impose any restrictions on participant’s ability to withdraw funds once contributed |
As you’re probably well aware, the 401(k) is an extremely popular type of defined contribution plan.
Employers who adopt a 401(k) plan are generally required to file an annual return (Form 5500) with the federal government. While third-party administrators will often assist in the preparation of this return, it is a good example of the additional administrative burden/cost that typically comes along with a Qualified Plan such as a 401(k) (as compared with IRA-Based Plans which do not require the filing of an annual return such as the 5500).
One of the key features that makes the 401(k) plan so popular with employers and employees alike is the funding flexibility. Most 401(k) plans will provide the sponsoring employer with a variety of funding options including employee deferrals, employer profit sharing and/or matching contributions, etc.
Another key benefit of 401(k) is the funding limit for 401(k) plans (for any one participant) is considerably higher than other plans. Keep in mind that just because the 401(k) plan allows for a maximum contribution of $53,000 ($59,000 if you’re age 50 or older), this does not automatically mean that the business owners and/or company executives will automatically be able to achieve these levels. In the end, you should look at your personal allocation goals and then explore what type of plan design will best enable you to cost effectively meet your personal retirement savings objectives as well as the broader company-wide objectives for sponsoring the plan.
Feature |
Summary |
Details |
---|---|---|
Employer Eligibility |
Few Restrictions |
No size restrictions |
Maximum Age Restriction |
Age 21 |
May exclude employees under age 21 |
Maximum Service Restriction |
1 Year of Service |
May exclude employees with less than 1 year of service |
Annual Notifications/Reporting |
Form 5500 |
Employer must file Form 5500 annually with IRS/DOL |
Funding Options |
Employer and Employee |
Allows for both employer contributions and employee deferrals |
Maximum Contribution (2016) |
$53,000 $59,000 (age 50+) |
Ability to reach maximum allocation depends on a variety of factors |
Special Features |
Considerable Plan Design Flexibility |
Flexibility can vary widely between providers |
Withdrawal Restrictions |
Yes |
Typically not distributable prior to death, disability. separation from service or plan termination |
The individual 401(k) plan is a type of 401(k) plan, as the name denotes, designed specifically for owner-only coverage. While you’ll find these plans marketed under a number of different names (Individual(k), Uni-K, Solo-K, Owner-Only 401(k)), the common characteristic is that these names are used to denote a 401(k) product that is designed specifically for the “owner-only” market.
Feature |
Summary |
Details |
---|---|---|
Employer Eligibility |
Restricted |
Only appropriate for businesses that qualify for |
Maximum Age Restriction |
Age 21 |
Potentially viable for business with common-law employees if all are under age 21 |
Maximum Service Restriction |
1 Year of Service |
Potentially viable for business with common-law employees if employees work less than 1000 hours/yr. |
Annual Notifications/Reporting |
Form 5500-EZ |
Must file Form 5500-EZ with IRS/DOL once plan assets reach $250,000 (and last plan year regardless of assets) |
Funding Options |
Employer and Employee |
Maximum contributions typically achieved through combination of profit sharing and employee deferral |
Maximum Contribution (2016) |
$53,000 $59,000 (age 50+) |
Ability to achieve maximum funding is dependent on business owner’s level of compensation |
Special Features |
Plan Loans Higher Funding |
May afford advantages not available through SEP or SIMPLE IRA (e.g., plan loans, higher funding) |
Withdrawal Restrictions |
Yes |
Typically not distributable prior to death, disability or separation from service or plan termination |
A payroll deduction IRA is a low-cost way for small employers to help their employees start saving for retirement. An employer can set up an IRA program through a bank, retirement provider or other financial institution with minimal costs to themselves or their business. Once the account is set up, employees can opt-out or authorize a payroll deduction. The employee contributions to the IRA are made after-tax, but the earnings will be tax-free.
With a payroll deduction IRA, employers are simply a middle-man and make no contributions on behalf of their employees. Employers are responsible for setting up the IRA program, deducting the desired amount from employees’ paycheck and passing on that deduction to the financial institution.
Feature |
Summary |
Details |
---|---|---|
Employer Eligibility |
Few Restrictions |
No size restrictions |
Maximum Age Restriction |
18 years old |
Cannot impose age restriction as with some other types of plans |
Maximum Service Restriction |
0 years |
If this account is offered to one employee, it must be offered to all. |
Annual Notifications/Reporting |
None |
This is not considered an employer retirement plan, and there are no annual filings or reporting. |
Funding Options |
Employee |
Funds are deducted straight from the employee’s paycheck. |
Maximum Contribution (2016) |
$6,000* $7,000* (age 50+) |
Employees can contribute a maximum of $6,000 a year. Those who are 50 years old and up are permitted “catch-up” contributions. |
Special Features |
Low involvement Low cost |
All the employer is responsible for is deducting the desired amount from the employee’s paycheck. Once the financial institution has the money, the employer is no longer involved. |
Withdrawal Restrictions |
10% tax on premature withdrawals |
Withdrawals made before the participant turns 59 ½ will be subject to income tax and a 10% additional tax |
Additional resources:
One of the key attributes that distinguishes IRA-Based Plans from Qualified Plans is the fact that contributions for IRA-Based Plans such as SEP Plans are made to IRA accounts that are individually established and maintained by each participating employee.
With regards to plan coverage, one of the unique characteristics of SEP Plans is that the employer can choose to require that an employee work for the company for up to three years before he or she is eligible to participate in the SEP Plan. While this is a moot point if your business doesn’t have employees, or if your objective is to cover employees who have worked for you for less than three years, this feature can be very appealing to some business owners who are looking to minimize or avoid coverage of shorter-term employees.
Perhaps the biggest drawback to the SEP Plan is that it does not allow for employees to make salary deferral contributions (except from some grandfathered SEP Plans established many years ago). That said, if allowing salary deferral contributions is not a priority and/or if you’re looking to exclude short-term employees from plan coverage, the SEP Plan option can be an extremely cost-effective option that provides many of the same tax benefits as more sophisticated and costly plans such as 401(k) plans.
Feature |
Summary |
Details |
---|---|---|
Employer Eligibility |
Few Restrictions |
No size restrictions |
Maximum Age Restriction |
21 |
May exclude employees under age 21 |
Maximum Service Restriction |
3 of past 5 years |
May exclude employees who have not worked for company during at least 3 of past 5 years |
Annual Notifications/Reporting |
Employee Notification |
No federal filing such as Form 5500 Employee notification requirements |
Funding Options |
Employer |
Except for certain grandfathered SEP plans established prior to 1997, employee deferrals not permitted |
Maximum Contribution (2016) |
$53,000 |
Maximum contribution is 25% of compensation (up to $53,000) |
Special Features |
Simplicity Min. Admin. Cost |
Contributions made to Traditional IRAs individually maintained by each plan participant |
Withdrawal Restrictions |
No |
Employer cannot impose any restrictions on participant’s ability to withdraw funds once contributed |
Links
[1] https://gphcc.venturize.org/es/tipos-de-planes
[2] https://gphcc.venturize.org/retirement/types-retirement-plans/401k-retirement-plans
[3] https://gphcc.venturize.org/retirement/types-retirement-plans/individual-401k-retirement-plan
[4] https://gphcc.venturize.org/retirement/types-retirement-plans/sep-ira-simplified-employee-pension
[5] https://gphcc.venturize.org/retirement/types-retirement-plans/simple-ira
[6] https://gphcc.venturize.org/retirement/types-retirement-plans/payroll-deduction-ira
[7] https://gphcc.venturize.org/retirement/retirement-resources/state-run-retirement-plans
[8] https://gphcc.venturize.org/es/planes-simple
[9] https://gphcc.venturize.org/es/planes-401k
[10] https://gphcc.venturize.org/es/planes-individuales-401k
[11] https://gphcc.venturize.org/es/deduccion-de-nomina-para-la-ira
[12] https://www.irs.gov/retirement-plans/choosing-a-retirement-plan-payroll-deduction-ira
[13] https://www.dol.gov/sites/dolgov/files/EBSA/about-ebsa/our-activities/resource-center/publications/payroll-deduction-iras-for-small-businesses.pdf
[14] https://gphcc.venturize.org/es/planes-sep