Small business retirement plans: what you need to know

A valuable benefit for you and your employees

Written by Kevin Hagen

Small business retirement plans present a great way for you to set aside money for your own retirement and also provide a valuable benefit to your employees. Setting up a plan does not have to be complex. You can choose one that best fits your business and your budget. And you can take advantage of tax breaks.

Types of small business retirement plans

• Defined benefit plans offers a specified monthly retirement payment, normally based on years of service and average salary. Your business makes the contributions needed to provide those benefits.
• Defined contribution plans establish the amount that can be contributed by employees and the employer. The money in the account is invested: the amount contributed plus earnings on the investments determine the monthly retirement payments.

Small business retirement plans are also categorized as:

• Qualified plans, which meet IRS requirements for deducting contributions and deferring tax on earnings. These plans do not allow preferential treatment for owners or highly compensated employees.
• Nonqualified plans, which don’t qualify for tax deductions or tax deferment, but can favor owners and highly compensated employees. Examples include excess benefit plans, deferred bonuses, and stock options.

If you choose a qualified plan you have several options:

• Simplified employee pension (SEP). Your business contributes to IRAs you set up for each of your employees, including yourself. This plan is easy to set up and operate, has low administrative costs, and provides for flexible annual contributions according to your budget. Your contributions are tax deductible. You can contribute up to 25% of compensation and must contribute to each employee's account in the same percentage you contribute to your own. A disadvantage is that employees are not allowed to contribute.
• Simple IRA. Employees can make pre-tax contributions and you generally match those contributions up to 3% of the employees' pay, unless you make non-elective contributions for 2% of the employees' compensation, whether they contribute or not. The maximum annual limit on total contributions is lower than for a SEP.
• A 401(k) plan can be set up by any business with one or more employees. This plan allows a higher level of salary deferment by employees. 401(k) plans can involve a higher administration cost.
• In a profit-sharing plan, you fund the retirement account with up to 25% of compensation, subject to an annual limit. Contributions can vary from year to year. Employees don’t contribute to the plan. A profit-sharing plan may be more complex to administer.

How to set up a plan

Most banks, brokerage firms, insurance companies, and other financial institutions can help you set up small business retirement plans. Depending on the complexity of the plan you choose and your own level of expertise, you may want to seek advice from your accountant, attorney or a pension consultant. You can also find valuable information and forms on the IRS' Web site.

If you’re ready to help employees’ prepare for their financial future outside of the workforce, submit a free BuyerZone request for small business retirement plans price quotes. We’ll match you to several providers in your area who will help you find a plan that best fits your needs.