Retirement Plans For Small Businesses

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There are a number of options for small businesses that want to set up a retirement plan for their employees. Employer and employee contributions to retirement plans are generally tax-deductible.

Three plans are specifically designed to make it easier for smaller businesses to set up a retirement plan. These plans require very little paper work and have low administrative costs.

myRA - my Retirement Account
SEP - Simplified Employee Pension
SIMPLE - Savings Incentive Match Plans for Employees

Other options for businesses include:
401(k) plans
Profit-sharing Plans

 

myRA - my Retirement Account

The myRA (short for "my Retirement Account") was developed by the U.S. Department of the Treasury and rolled out in 2015. The myRA is a very simple, low-cost way for employers to offer a savings plan at work. Here are some key features of the myRA:

  • As an employer, it is free to set up for U.S. companies and nonprofits of any size, and you do not administer employee accounts, contribute to them, or match employee contributions. Your employees fill out a form and you set up payroll direct deposit into their myRA accounts.
  • For employees, the account offers a safe, affordable way to save. The myRA account is a Roth IRA, but there are a few key differences. Most notably, there is no cost or minimum contribution required for a worker to open a myRA account. A worker can contribute any amount they choose ($2, $20, $200--whatever fits the budget.) Most IRAs typically require $1,000 or more in initial contributions. There are also no maintenance fees. The investment is low-risk; it is backed by the U.S. Treasury and contributions are guaranteed from loss. In addition, the myRA accounts belong to the worker and are not associated with the employer. Workers can keep their same account even if they change jobs. 
  • MyRA does not replace a 401(k) or other types of retirement plan, but rather it's designed for companies and organization who do not offer any other type of retirement plan. 
  • MyRAs are capped at $15,000, after which the employees' accounts get rolled into a private Roth IRA (or a 401(k) plan if the worker has access to one at some future time).

 

To learn more about setting up a myRA plan, visit myra.gov. You can also contact myRA Outreach and Employer Support at 844-874-7590, or via email at myRAemployers@stls.frb.org.

 

SEP - Simplified Employee Pension

Under a SEP, an employer contributes directly to traditional individual retirement accounts (SEP-IRAs) for all eligible employees (including themselves). A SEP does not have the start-up and operating costs of a conventional retirement plan. Contributions to a SEP are also tax deductible and your business pays no taxes on the earnings on the investments. A business of any size, even someone self-employed, can set up a SEP.

How it works:

  • The employer chooses a percentage to contribute. In 2017, this amount can up to 25% of compensation, with a maximum of $54,000.
  • Each year, the employer can decide how much to put into a SEP, and you are not locked into making contributions every year.
  • Generally, you do not have to file any documents with the government.

 

Easy to set up:

  • The employer fills out a short form.
  • The employer finds a bank, mutual fund, or other financial institution with which to set up the plan. The financial institution will complete additional paperwork.
  • Administrative costs are low.

 

Good for employees:

  • Employees are 100% vested in all contributions;
  • Employees can choose where to invest their money; and
  • Employees keep their accounts when they change jobs.

 

The Department of Labor has additional information and resources about setting up a SEP. www.dol.gov/ebsa/Publications/SEPPlans.html

 

SIMPLE - Savings Incentive Match Plans for Employees

A SIMPLE plan allows employees and employers to contribute to traditional IRAs set up for employees. It is ideally suited as a start-up retirement savings plan for small employers not currently sponsoring a retirement plan. Employers with 100 or fewer employees can set up a SIMPLE.

How it works:

  • Largely funded by employee contributions, but limited employer contribution required.
  • In 2017, employees may contribute a percentage of their salary, up to $12,500 a year (plus an additional $3,000 if you're 50 or older)
  • Each year, the employer contributes either:
o an amount that is equal to the employee's contribution (up to 3% of pay), or
o a fixed contribution of 2% of the employees' wages

 

Easy to set up:

  • The employer fills out a short form.
  • The employer finds a bank, mutual fund or other financial institution with which to set up the plan. The financial institution will complete additional paperwork.
  • Administrative costs are low.
  • No IRS reporting is required.

 

Good for employees:

  • Employees are 100% vested in all contributions;
  • Employees can choose where to invest their money; and
  • Employees keep their accounts when they change jobs.

 

The Department of Labor has additional information and resources about setting up a SIMPLE Plan: http://www.dol.gov/ebsa/publications/simple.html

To learn more about the differences between a SEP and SIMPLE Plan, check out this helpful chart from USAA: 

https://www.usaa.com/inet/pages/ira_simple_vs_sep

 

401(k) Plans and Profit-Sharing Plans

How 401(k)s work:

  • Employees contribute a percentage of their pay to the 401(k) up to a certain limit. In 2017, the contribution limit is $18,000 (plus an additional $6,000 if you're 50 or older). Salary deferrals can be either on a pre-tax basis or as designated Roth contributions.
  • The employer may match the contribution.
  • 401(k)s are more complex to administer than SIMPLEs, but may allow higher contributions.
  • Unlike SIMPLE and SEPs, these plans require reporting to the government.

 

How profit-sharing plans work:

  • The employer bases contributions on business profits or a percentage of pay.
  • The employer can change the percentage each year.

 

 



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