The vast majority of businesses in the U.S employ fewer than 100 workers, yet these employees have less access to things like retirement planning vehicles and other benefits than those who work for larger companies. Here’s an overview of all the major features of each kind of retirement plan, including SIMPLE, SEP, 401(k), defined-benefit, and profit-sharing plans. In choosing the right plan, it pays to have a working familiarity with the different kinds of retirement options.
Below, I’ve compiled the major features of each type of plan, along with an overview of benefits
SIMPLIFIED EMPLOYEE PENSION (SEP)
A SEP will allow you to set up a type of IRA for yourself and each of your employees. You must contribute a uniform percentage of pay for each employee, although you won’t have to make contributions every year. SEPs have low start-up and operating costs and can be established using a two-page form. As a small employer, you can also decide how much to put into a SEP each year, offering flexibility when business conditions vary.
Key Advantage: Easy to set up and maintain
Employer’s role: Set up plan for selecting a plan sponsor and completing IRS Form 5305-SEP. No annual filing requirements for employer
Contributors to the plan: Employer contributions only; 100% tax-deductible
Date to set up new plan: By due date of tax return (including extensions)
Maximum annual contribution (per participant): Up to 25% of W-2 wages or 20% of net adjusted self-employment income for a maximum of $52,000 in 2014
Contributor’s options: Employer can decide whether to make contributions year-to-year
Minimum employee coverage requirements: Must be offered to all employees who are at least 21 years of age, were employed by the employer for 3 of the last 5 years and had earned income of more than $550
Participant Loans: Not allowed
401(k) PLAN
401(k) plans – both traditional and Roth – have become a widely accepted retirement savings vehicle for small businesses. They can vary significantly in their complexity
Key advantage: Permits higher level of salary deferrals by employees
Employer eligibility: Any employer with one or more employees
Employer’s role: No model form available. Advice from financial institution or employee benefit advisor may be necessary. Annual filing of Form 5500 is required. Also may require annual nondiscrimination testing to ensure plan does not discriminate in favor of highly compensated employees.
Contributors to the plan: Employee salary reduction contributions and/or employer contributions
Maximum annual contribution (per participant): Employee: $17,500 ($23,000 for participants 50+) in 2014.
Employer/employee combined: The lesser of 100% of compensation or $52,000 ($57,500 including catch-up contributions for 50+) in 2014.
Contributor’s options: Employee can elect how much to contribute pursuant to a salary reduction agreement. The employee can make additional contributions, including possible matching contributions, as set by plan terms.
Minimum employee coverage requirements: Generally, must be offered to all employees at least 21 years of age who have completed a year of service with the employer
Vesting: Employee salary deferrals are immediately 100% vested. Employer contributions may vest over time according to plan terms.
Participant loans: Plan may permit loans and hardship withdrawals.
Withdrawals: Withdrawals permitted after a specified event occurs (e.g., retirement, plan termination). Early withdrawals subject to tax penalty
DEFINED BENEFIT
Provide a fixed, pre-established benefit for employees. This traditional type of pension plan is often viewed as having more value by employees and may provide a greater benefit at retirement than any other type of plan. However, defined plans are more complex and therefore costlier to establish and maintain than other types of plans.
Key advantage: Provides a fixed, pre-established benefit for employees; allows higher tax-deductible contribution for older employees
Employer eligibility: Any employer with one or more employees
Employer’s role: No model form available. Advice from financial institution or employee benefit advisor may be necessary. Annual filing of Form 5500 is required. An actuary must determine annual contributions.
Contributors to the plan: Primarily funded by employer
Maximum annual contribution (per participant): Actuarially determined
Maximum annual benefit: The maximum annual benefit at retirement is the lesser of $210,000 or 100% of final average pay
Contributor’s options Employer generally required to make contribution as set by plan terms
Minimum employee coverage requirements: Generally, must be offered to all employees at least 21 years of age who worked at least 1,000 hours in a previous year
Vesting: Rights to benefits may vest over time according to plan terms
Participant loans: Plan may permit loans
PROFIT – SHARING
Your contributions as an employer to a profit-sharing plan are discretionary. Depending on the plan terms, there is often no set amount that an employer needs to contribute each year. As with 401(k) plans, profit-sharing plans can vary greatly in their complexity.
Key advantage: Permits employer to make large contributions for employees
Employer eligibility: Any employer with one or more employees
Employer’s role: No model form available. Advice from financial institution or employee benefit advisor may be necessary. Annual filing of Form 5500 is required.
Contributors to the plan: Annual employer contribution is discretionary. Date to set up new plan By year end (generally Dec. 31)
Date contributions are due: Due date of tax return, including extensions
Maximum annual contribution (per participant): The lesser of 100% of compensation or $52,000 in 2014. Employer can deduct amounts that do not exceed 25% of aggregate compensation for all participants.
Contributor’s options: Employer makes contribution as set by plan terms. Employee contributions, if allowed, are set by plan terms.
Minimum employee coverage requirements: Generally, must be offered to all employees at least 21 years of age who worked at least 1,000 hours in a previous year.
Vesting: Employee salary reduction contributions and most employer contributions are immediately 100% vested. Employer contributions may vest over time according to plan terms (5-year cliff or 3-7 year graded, or 2-6 year graded if top-heavy)
Participant loans: Plan may permit loans
Withdrawals: Withdrawals permitted after a specified event occurs (e.g., retirement, plan termination). Early withdrawals subject to tax penalty.
SIMPLE IRA
SIMPLE (Savings Incentive Match Programs for Employees of Small Employers) plans are usually set up as IRAs. They are easy to establish and inexpensive to administer. Your contributions as an employer are flexible: you can either match employee contributions dollar for dollar—up to 3% of an employee’s compensation—or make a fixed contribution of 2% of compensation for all eligible employees.
Key advantage: Employers who set up a new plan may be eligible for a tax credit of up to $500 a year for the first 3 years to help defray the costs of starting the plan. File IRS Form 8881
Employer eligibility: Any employer with 100 or fewer employees that does not currently maintain another retirement plan
Employer’s role: Set up plan by completing IRS Form 5304-SIMPLE or IRS Form 5305-SIMPLE. No annual filing requirements for employer. Bank or financial institution processes most of the paperwork.
Contributors to the plan: Employee salary reduction contributions and employer contributions
Date to set up new plan: Generally by 10/1 of the year before the start of the plan
Date contributions are due: Due date of tax return, including extensions; elective deferrals by participants due 30 days after the last day of the month for which contributions are made
Maximum annual contribution (per participant): Employee: Up to $12,000 in 2014 ($14,500 if age 50+). Employer: Either match employee contributions 100% of first 3% of compensation (can be reduced to as low as 1% in any 2 out of 5 years); or contribute 2% of each eligible employee’s compensation (up to $260,000 of compensation in 2014).
Contributor’s options: Employee can decide how much to contribute. Employer must make matching contributions or contribute 2% of each employee’s compensation (up to $260,000 of compensation in 2014).
Minimum employee coverage requirements: Must be offered to all employees who have earned income of at least $5,000 in any prior 2 years and are reasonably expected to earn at least $5,000 in the current year
Vesting: Employer and employee contributions are immediately vested 100%
Participant loans: None allowed
Withdrawals: Can occur any time after contribution is made, but 25% penalty if withdrawal occurs during 2-year period beginning on the first day of participation
Small Business Retirement Plans
