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The Top Three Retirement Plans for Small Businesses

Posted by Corey F. Schechter | Mar 27, 2017 | 0 Comments

Contributing Author: Dianne L. Schechter

There are quite a few different retirement benefit plan options out there--and many of them are specifically designed for small businesses.  Let's go over the essentials so you can make a great decision for your company.

Three options stand-out depending on what you want to accomplish with your plan and how much flexibility you need.  These are: 401(k) plans, SEP IRAs and SIMPLE IRAs.

The 401(k) Plan Offers the Most Flexibility (and High Contribution Limits):

The traditional 401(k) is probably the most widely known and utilized retirement product on the market.  It is generally defined as one that enables a business owner and employees to make consistent, tax-deferred contributions during their careers. But 401(k) plans offer a lot more versatility than that. 

401(k)s not only offer higher contribution limits than most other plan options, but also offer more choices in design to manage business costs and program saving goals.  You, as the employer, can choose to match employee contributions, provide a vesting schedule for matching contributions (note, employees are always 100% vested in their own salary deferrals), or enable penalty-free access to funds via a loan or hardship distribution if an emergency arises.  401(k) plans also allow for “catch-up” contributions after reaching the age of 50.  In 2017, employees can contribute up to $18,000 if under 50 years of age, $24,000 if 50 or older.

401(k)s may also have a “safe harbor” component which allows the plan to avoid discrimination testing requirements imposed by the IRS by having the employer make an automatic matching contribution up to a certain percentage of their employees' compensation.

For small businesses and employees that may fear higher tax rates down the road, the Roth 401(k) component enables participants to have their contributions taxed immediately, but withdrawals in retirement are tax-free--earnings and all.  This can be a big help in managing your employees' tax situation and money over time.

SEP IRAs are Pretty Easy to Start and 100% Funded by the Employer:

Simplified Employee Pensions, more commonly referred to as SEPs, are also a popular retirement plan choice as they offer a contribution limit that's similar to a 401(k).  One of the most important things to understand about SEPs is that 100 percent of the contributions made are by the employer (no employee contributions allowed) and these dollars are immediately vested for the employee.  There is no Roth option, no loan option, no profit sharing option, and no catch-up contributions for those over 50 years of age like there are with a 401(k).  But, in general, it doesn't have the added IRS tests and reporting that non-safe harbor 401(k) plans do.

The SIMPLE IRA is a Solid, Affordable Option:

The SIMPLE IRA's name is a bit misleading (it actually stands for Savings Incentive Match Plan for Employees).  While both employer and employee can contribute to the plan, the employer must match and matching is vested immediately.  Also, the employee contribution limit is set at $12,500 for 2017, a full $5,500 less than a 401(k).  The catch-up for those over 50 is also less at $3,000 versus $6,000 for a 401(k).  It also doesn't have Roth or loan options, but like the SEP, avoids those pesky IRS tests and reporting requirements of a 401(k).

The retirement benefit plans discussed above are just a few options available to your business. There are many others out there, some of which could be more beneficial to your business, your employees, and your overall goals as a business owner. Contact the attorneys at Butterfield Schechter LLP today to discuss the best option for you and your business and assist in establishing an employee benefit plan to help your business succeed.

About the Author

Corey F. Schechter

Corey Schechter practices in the areas of Employee Benefits, Employee Stock Ownership Plans, Pension and Profit Sharing Plans, ERISA, ERISA Litigation, Business Law, Qualified Domestic Relations Orders (QDROs), and Employment and Labor Law.

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