Retirement Plans For Small Businesses

 

There are a number of options for small businesses that want to set up retirement plans for their employees.  Employer and employee contributions to retirement plans are generally tax-deductible. Two plans are specifically designed to make it easier for businesses with 100 or fewer employees to set up a plan. These two plans require very little paperwork and have low administrative costs. 

  •     SIMPLE  –  Savings Incentive Match Plans for Employees of Small Employers, and
  •     SEP – Simplified Employee Pension.
Other options include:
  •     401(k) plans,
  •     Profit-sharing Plans,
  •     Payroll Deduction IRAs - while not a pension plan, this can help employees save for retirement, or
  •     Keoghs for self-employed individuals - profit-sharing and money purchase.
SIMPLE – Savings Incentive Match Plans for Employees of Small Employers

Employers with 100 or fewer employees can set up a SIMPLE. 
  •     Employees may contribute a percentage of their salary, up to $11,500 a year in 2010. 
  •     Each year, the employer contributes either: An amount that is equal to the employee’s contribution (up to 3% of pay) or a fixed contribution of 2% of the employee’s 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.

 

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 Employee Benefits Security Administration has additional information and the forms needed to start a SIMPLE. Call 1-866-487-2365 or visit their website at www.dol.gov/ebsa.

SEP – Simplified Employee Pension

How it works:

  •     The employer chooses a percentage (up to 25% of compensation, with a maximum of $49,000 in 2010) to contribute.
  •     Each year, the employer can decide how much to put into a SEP.

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 Employee Benefits Security Administration has additional information and the forms needed to start a SEP. Call 1-866-487-2365 or visit their website at www.dol.gov/ebsa.

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.
  •     The employer may match the contribution.
  •     401(k)s are more complex to administer than SIMPLEs, but may allow higher contributions.

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.

Payroll Deduction IRA

Even if an employer does not want to set up a retirement plan, it can provide a way for eligible employees to contribute to an IRA.

How this helps employees:
  •     Many individuals who are eligible to contribute to an IRA do not.
  •     Payroll deductions help individuals contribute smaller amounts each pay period, rather than trying to find a larger amount at the end of the year.

Keoghs - Profit Sharing, Money Purchase and a Combination

  •     Keoghs are also known as HR 10 Plans.
  •     A Keogh plan includes coverage for a self-employed individual. 
  •     Generally, you will need the help of an accountant, financial planner or financial institution to set one up.
  •     A Keogh has a higher administrative cost to set up and maintain.

Profit Sharing Keogh
  •     You can contribute up to 25% (with a maximum of $49,000) a year in 2010. 
  •     The percentage can change each year.

Money Purchase Keogh
  •     You select a percentage of income to contribute, up to 25% (a maximum of $49,000). 
  •     The percentage becomes fixed and the annual payments are mandatory.  You would pay a penalty to the IRS if you fail to make the mandatory payment.

Combination
  •     You can choose to have both types of Keogh. For example, contribute 15% under the profit-sharing plan and 10% under the money purchase plan, for a combined total at the 25% of earned income ($49,000 maximum).

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