Retirement Plans For Small Businesses

A retirement plan can do wonders when it comes to recruiting, and retaining, good employees. If you don’t have anything in place, or if your current plan is not very attractive, read on. The following represent some of the options you might want to consider. The right choice for your small business will depend upon various factors, including the number of employees you have and the administrative resources available to you.

• A Simplified Employee Pension Plan (otherwise known as a SEP IRA) is a simple option –easy to maintain and low cost-- for a firm with just a few employees. Any business owner or self-employed individual is eligible to participate. Funding for the plan is provided by the employer only. You are allowed to put up 25 percent of the compensation you receive from your own company into the plan, or 20 percent if you are self-employed. There is a ceiling of $45,000, whether you head your own firm or are self-employed. Bear in mind, you are required to contribute the same percentage contribution to each eligible employee account that you make to your own account. Your employees are not permitted to make their own contributions to this type of plan.

Pros: Vesting is immediate. Contributions do not have to be made every year (very useful if you hit a lean period). You don’t need a plan document or to file annual reports with the IRS. Easy and inexpensive to set up and administer.

Considerations: The employer must contribute to the plan for all eligible employees (those who have worked for 3 of the 5 past years for your firm, and who earned a minimum of $500 from you during the last year).

• Savings Incentive Match Plan for Employees (SIMPLE IRA) is an optionif you have 100 or less employees and no other retirement plan in place. Unlike the previous option, the SIMPLE IRA allows employees to make their own contributions. Employers are required to match employees’ savings. Eligible employees must have earned more than $5,000 at your firm in any two years prior to the plan start-up and –once the plan starts up-- will earn at least $5,000 in that year.

Pros: Simple to set up and administer. Employees can participate. Business owners –or self-employed— with more modest annual earnings can probably make larger contributions under the terms of this plan.

Considerations: Immediate vesting for all plan participants. The employer’s matching participation is required. Employees can make contributions up to a ceiling of $10,500 –with matching employer contributions required to represent up to 3 percent of the employee’s salary, or the employer makes a mandatory contribution of 2 percent of each employee’s salary (with a ceiling of $4,500) regardless of whether individual employees participate or not. The business owner (employer) may contribute $10,000 plus matching company funds to his/her own SIMPLE IRA account with an additional $2,500 permitted if the business owner is aged 50 or more.

For some businesses, profit-sharing plans make sense. This type of plan gives the business owner a bit more autonomy. Employees do not contribute. The business owner determines the vesting time frame, and can vary the annual contributions made to the profit-sharing fund based upon the company’s performance year-to-year. Contribution limits are not to exceed 25 percent of salary (20 percent for self-employed income) up to $45,000. In order to qualify for participation in a profit sharing plan, employees must have worked at least 1,000 hours in the past year, or 2,000 if no vesting period is required. Administration of this type of plan usually requires hiring specially qualified help.

There are also some 401 (k) packages –with more limitations but lower fees than fancier options—available from large brokerage firms designed to attract small firms with 25 employees or less. Of course, these come with annual administration fees and a set fee per participant.

Before you make any decisions about retirement plans, be sure to consult your professional tax advisor and your financial consultant about your options and preferences.