Retirement plans for small businesses can be easy to administer and maintain. Once the plan is set up, the primary responsibilities of the business owner are depositing plan contributions and providing plan notices to employees.
Retirement plans also offer tax benefits to the business, including the ability to deduct contributions, and for certain eligible employers, take a tax credit up to $500 per year for three years.
A retirement plan also provides tax benefits to those who participate in the plan. Contributions and investment earnings are not taxed until taken out of the plan.
A 401k plan can also allow after-tax Roth contributions, which will be taxable to you when you contribute them to your plan account but are tax-free if not withdrawn until you retire. Savers credits are also available for those who qualify.
Providing a retirement plan is one of the most effective ways business owners can help themselves and their employees prepare for retirement.
One common myth among business owners is that offering a retirement plan to employees is not affordable. However, small business plans do not have to be complicated or expensive. Three types of retirement plans are popular with small businesses: SEP, SIMPLE IRA, and 401k. Understand your options and the benefits available under each type of plan, and you will find the one that is the right fit for your company.
A Simplified Employee Pension (SEP) plan is an IRA-based retirement plan funded only with employer contributions. The employer may decide from year-to-year whether to make contributions as well as an amount to contribute. SEP contributions are deposited in an eligible employee’s traditional IRA. A SEP plan could be suitable for both a self-employed business owner and an employer with employees.
A Savings Incentive Match Plan for Employees of Small Employers (SIMPLE) IRA plan is another IRA-based retirement plan option for small businesses. Only businesses with 100 or fewer employees may establish a SIMPLE IRA plan. A SIMPLE plan is like a 401k plan in that employees can defer a portion of their salary.
Unlike a 401k plan which requires complex nondiscrimination testing, SIMPLE IRA plans have no testing requirements.
In exchange for the more straightforward administration requirements, SIMPLE IRA plans have lower contribution limits than 401k plans and require the employer to make a matching or nonelective contribution for eligible employees.
A SIMPLE IRA plan would not be appropriate for a self-employed individual with no employees.
A 401k is a savings vehicle established by a business to help the business owner and employees save for retirement. Employees can defer a portion of their salary into the plan, and many businesses choose to match a portion of the employees’ contributions, helping retirement savings grow even faster.
A 401k plan provides all the same tax advantages (tax deductions, tax-deferred earnings, and tax-credits) as the other types of plans, but a 401k plan also offers unique benefits:
With the budget-friendly, easy-to-use 401k solutions from Ubiquity Retirement + Savings, small business owners can take advantage of all the benefits of a 401k plan, including our “Single(k)” plan for businesses that employ only the owners (and spouses) or only employees who wouldn’t be eligible to participate in the plan.
Here is a comparison of the maximum contribution possibilities under a SEP plan, a SIMPLE IRA plan, and a 401k plan for a business owner, age 55, with $100,000 of compensation for 2019.
SIMPLE IRA Plan
Easy to set up and maintain
Salary reduction plan with little administrative work
Permits high level of salary deferrals by employees
Any employer with 100 or fewer employees that do not maintain another plan
Any employer other than a state or local unit of government
Maximum annual contribution (per participant)
Employer: up to 25% of compensation but no more than $56,000 for 2019
Employee: $13,000 in 2019; participants age 50 or over can make additional contributions up to $3,000 in 2019
Employer: Must either match employee contributions 100% of first 3% of compensation (can be reduced to as low as 1% in any 2 out of 5 yrs.), or contribute 2% of each eligible employee’s compensation
Employee: $19,000 in 2019; pre-tax or Roth; participants age 50 or over can make additional contributions up to $6,000 in 2018
Employer/Employee combined: Up to the lesser of 100% of compensation or $62,000 for 2019; an employer can deduct all salary deferrals and employer amounts that do not exceed 25% of all participants’ compensation
Minimum employee coverage requirements
Must be offered to all employees who are at least 21 years of age, employed by the employer for three of the last five years and had compensation of $600 for 2018
Must be offered to all employees who have earned an income of at least $5,000 in any prior two years and are reasonably expected to earn at least $5,000 in the current year
Generally, must be offered to all employees at least 21 years old who worked at least 1,000 hours in a previous year
Withdrawals, loans, and payments
Withdrawals permitted anytime; subject to federal income taxes; early withdrawals (generally under age 59½) subject to additional 10% tax; loans not allowed
Withdrawals permitted anytime; subject to federal income taxes; early withdrawals subject to 25% tax within first two years of participation, 10% after that; loans not allowed
Withdrawals permitted after a specified event occurs (e.g., retirement); subject to federal income taxes, early withdrawals subject to 10% tax; plan may permit loans & hardship withdrawals
* Excerpts taken from IRS Publication 3998, Choosing a Retirement Solution for Your Small Business, https://www.irs.gov/pub/irs-pdf/p3998.pdf