August 13, 2019
Choosing the right retirement plan for your employees can be tricky, and of course whatever plan you select needs to work for your entire business. Here are some factors that you might want to consider before choosing retirement coverage:
How many employees do you have?
If your small business is being run by you and your partner or spouse, then to get the highest possible contribution limits you should think about a Self-Employed 401(k). That may depend on whether you intend to take on more employees as your business grows however, in which case you might have to choose between a SEP IRA and a SIMPLE IRA, which can both give coverage to employees. You will then need to decide whether you want to fund your employees' accounts yourself by means of a SEP or whether your employees should contribute by means of a SIMPLE.
Who pays into the plan and how much?
Once you’ve selected a retirement plan, you’ll need to consider the contribution limits and decide upon whose responsibility it will be to make the contributions. In recognizing that self- employed individuals can be both an employee and employer, a Self-Employed 401(k) offers the largest possible contribution, and as an employee you can make elective deferrals of up to $19,000 for the current year. As an employer, you are permitted to make a profit-sharing contribution of up to 25% of compensation and up to $56,000 for the current year.
If you or your employees are 50 or older, this type of coverage allows for catch-up contributions of up to $6,000 and enables them to be eligible for added tax breaks.
If your business is not incorporated means that you are usually permitted to deduct contributions for yourself from your personal income, while if it is incorporated, the contributions can be deducted as a business expense.
For businesses with an income that varies, a SEP IRA might give you more flexibility, but you may have to contribute the same percentage for your employees as you do for yourself. If you’re an employer, then you’re permitted to contribute up to 25% of compensation and up to a maximum of $56,000 for the current year, but you don’t have to contribute every year. If, on the other hand, you want your employees to help fund their retirement account, then you might want to think about a SIMPLE IRA, which is available to businesses who employ up to 100 people. Salary deferral contributions can be made by employees with this plan, of up to 100% of compensation, but must not exceed $13,000 for the current year. As the employer, you must also contribute to their retirement accounts by either matching their contributions dollar for dollar up to 3% of compensation or contribute 2% of their eligible compensation.
How costly are these plans?
The Self-Employed 401(k), SEP IRA and SIMPLE IRA are all plans that are relatively uncostly and relatively painless to set up. SEP IRA’s and SIMPLE IRA’s do not require annual plan filings with the IRS, instead of needing just certain employee notifications. The Self-Employed 401(k) does take a little more input, however, requiring an annual Form 5500 filing once plan assets go over $250,000. To discuss which retirement plan would best suit you and your small business, reach out to a reputable payroll company who can talk through your options in greater detail before you make any decisions.