Do You Have the Right Small Business Retirement Plan?

By: Joseph Caputo – Chief Information Officer and Associate Portfolio Manager

Has your business established a retirement plan that is right for you and your employees? If you are like many business owners, you probably do not have the time to research all the different plans and options that are available, based on the type of business you run. For example, depending on your business, you could establish a SEP IRA, a 401(k), a Profit Sharing Plan, or even a Defined Benefit Pension Plan.

There are many options, and it is important that you have a plan in place. If you are in the process of recruiting or expanding your work force, a well-designed plan could be the difference between talented individuals joining your team and deciding to work somewhere else.

Despite the many differences in plan designs, most have a few things in common. For starters, a small-business retirement plan not only allows you to save for retirement, it also allows you to reduce your tax liability today. As an added benefit, some plans allow your employees to contribute extra funds for their own retirements.

There are many factors to consider when you are choosing a plan or evaluating the suitability of your current one. For example, your target retirement date may influence which available investment choices are appropriate for your situation. In addition you’ll want to ask:

  • Does the plan carry high fees?
  • What are the underlying mutual fund expense ratios?
  • Is the plan diversified?

A professional investment advisor can help evaluate your needs and recommend a plan.

As a starting point, consider the following employer-sponsored retirement plans for small businesses:

401(k) Safe Harbor Plans (Named after Section 401(k) of Internal Revenue Code). These plans can be appropriate for companies with two or more employees. A plan participant can contribute up to $17,500 of his or her salary ($23,000 for age 50 and older) on a pre-tax basis, as a Roth contribution, or as a combination of pre-tax and Roth. In addition to the employee elective deferrals, the employer has the option to contribute employer matching contributions and/or employer non-elective contributions (prof-it-sharing contributions), not to exceed a total employee and employer contribution of $52,000 ($57,500 for age 50 and older). There are several investment options and models to choose from. A customized plan can be created for your business.

Individual-401(k) Plans (Solo 401k). Designed for the sole-proprietor and his or her family, this plan adopts rules similar to a 401(k) Plan.

SEP (Simplified Employee Pension) Plans. A SEP provides business owners with a simplified method to contribute toward their employees’, as well as their own, retirement savings. SEP plans are tailored for small businesses and for the self-employed. SEP plans are easy to establish and administer and have no annual IRS filing requirements.  Employee participants can choose their own investment allocations and models, and contributions are always 100 percent vested. Employer contributions to a SEP must be in the same percentage of salary to each eligible employee. SEPs do not permit employee elective deferrals. The employer’s contribution is deductible as an employer expense.

SIMPLE (Savings Incentive Match Plans for Employees) Plans. This type of plan can be appropriate for a company with 100 or fewer employees. A SIMPLE IRA plan allows employees and employers to contribute to traditional IRAs set up for employees. It is well-suited as a start-up retirement savings plan for small employers not currently sponsoring a retirement plan. SIMPLEs are easily established; however, the employer cannot have any other retirement plan already established. Each year, the employer is required to contribute either a matching contribution up to 3 percent of compensation (not limited by the annual compensation limit), or 2 percent non-elective contribution for each eligible employee. Employees are always 100 percent vested for both contribution types.

Source: IRS.gov

BWFA is ready to assist small business owners with their investment needs. contact us at 410-461-3900 or emailus@bwfa.com if we can be of help to you.