Home | Business Advice | Retirement Planning
Choosing a Retirement Plan for Your Business
Small businesses and their owners have many retirement plan options. Choosing the right plan, or combination of plans, can be helpful in running your business and for your own retirement planning. This guideline provides some basic information. The rules can be complex, however so you should consult with a retirement plan professional as part of the decision-making process.
Why have a plan?
For the owner, a qualified retirement plan can be an advantageous way to accumulate wealth. Contributions to the plan can be tax-deductible, earnings within the plan are tax-deferred, and there can be flexible ways to take distributions from the plan.
For the business, providing a retirement plan can be a part of the total compensation package for your employees. The right plan can help attract, retain, and motivate your employees.
How much does it have to cost?
Your cost for a retirement plan will take two forms: (i) company contributions to the plan on behalf of employees and yourself; and (ii) the cost of establishing and administering the plan. The chart below describes some of the funding features of different types of plans. Choosing a plan that allows for employee deferrals without requiring significant company contributions may be the best option— permitting the accumulation of larger amounts of money, and keeping the cost to your company low.
The administrative costs of plans vary. Some plans are as simple as employees having IRA accounts to receive contributions, while others require annual IRS filings and audits. Be sure to discuss the services you need, and the administrative costs they will entail, with your service provider.
How much responsibility do you, as the manager, want?
Once money is contributed to a plan, it must be managed and someone must make the investment decisions. This means either the trustee of the plan must make investment decisions (or choose investment managers), or having a plan that enables each participant to manage their own funds. More and more plans are going this “self-directed” route.
Brief summary of retirement plan types
A SEP is a simplified employee pension plan; a SIMPLE is a savings incentive matched plan; and a 401(k) is a qualified retirement plan. There are various types of each plan. A few are set forth in the table below.
Features |
SEP |
SIMPLE 401(k) |
401(k) |
Eligibility |
Employees, Self-employed individuals, and business owners, |
Businesses with 100 or fewer employees not offering any other retirement plan |
Any public or private company. Usually for companies with more than 25 employees |
Advantage |
Easy to set up and maintain |
Salary reduction with lower administration; no non-discrimination rules |
More features like vesting and loan provisions |
Contribution source(s) |
Employer contributions to a SEP-IRA set up for each employee |
Employee wage deferral and employer contributions |
Mostly employee wage deferral and optional company contributions |
Annual contribution limits |
Up to 25% of compensation, with maximum of $69,000 for 2024. |
Employee:100% of wages up to $16,000; up to $19,500 if age 50 or over for 2024. Employer: Matching contributions of up to 3% of salary or 2% elective contribution. |
Employee: $23,000; up to $30,500 if age 50 or over for 2024. Combined Employer and employee maximum of $69,000; up to $76,500 if age 50 or over for 2024. |
Vesting |
Immediate |
Employer and employee amounts are immediately vested |
Employee amounts are vested immediately. Employer amounts can be subject to vesting schedules |
Administrative Issues |
No employer filings required |
Form 5500 |
Form 5500 and special discrimination testing required |
Summary
The right retirement plan can serve many purposes. Be sure to investigate all the options to make sure your plan accomplishes what you want. The services of a qualified retirement plan specialist can be very valuable in reviewing the many options available.