What Type of Retirement Plan Should My Small Business Put in Place?

Types of small business retirement plans

According to the IRS, Americans will need 70-90% of their preretirement income to maintain their current standard of living once they leave the job market. As an employer, you can certainly influence the retirement savings habits of your employees, today, so they can have a secure retirement future. Offering a retirement plan to your employees will also help you attract and retain the best employees. Finally, some retirement plans offer significant tax reduction opportunities for business owners, family members, and investors.

So…which type of retirement plan is right for you and your company?

When it comes to small and emerging businesses looking to set up a retirement plan for the first time, we generally recommend a 401(k) Plan. Businesses and their owners are often surprised to learn that a new 401(k) Plan can be implemented at a very low cost and ongoing costs can also be minimized, especially in comparison to medical benefits. Clients often hear about a SEP or SIMPLE IRA – both are marketed as cheaper and easier to maintain because they are exempt from certain IRS and Department of Labor filing requirements. However, neither offers much flexibility and savings and tax reduction opportunities for business owners are limited. Tax reduction options should be important to business owners and executives.

What is a SEP IRA?

A SEP Plan allows employers to contribute to traditional IRAs (SEP-IRAs) set up for employees. A business of any size, even self-employed, can establish a SEP.

  • Employees can’t make contributions but will still receive employer contributions.
  • Contribution amounts are limited.
  • Limited ability to put in place eligibility criteria for company contributions.
  • Employer contributions must be equal to all employees, including owners.
  • Participant Loans are not permitted.
  • Low start-up and operating costs.
  • You can decide how much to put into a SEP each year – offering you some flexibility.

What is a SIMPLE IRA?

A SIMPLE IRA Plan is a savings Plan for employers with 100 or fewer employees. This Plan allows employees to contribute a percentage of their salary each paycheck and requires employer contributions.

  • Employees may choose to make salary reduction contributions and the employer is required to make either matching or non-elective contributions.
  • Employee contributions limits: $13,000 in 2019.
  • Employee catch-up contributions limits: $3,000 in 2019.
  • Employer must make a contribution each year of 2-3% of each eligible employee’s compensation.
  • No additional contributions can be made (vs. profit share contributions in a 401k Plan)
  • Participant loans are not allowed.

What is a Solo 401(k) Plan?

One-Participant 401(k) Plans are fairly common. With a One-Participant 401(k) Plan, the business owner is considered both the employee and the employer; there are no other employees beyond the owner. These Plans generally have the same rules and requirements as any other 401(k) Plan, with some exceptions depending on the amount of money in the Plan and the type of assets.

  • Total contributions can’t exceed $56,000 for 2019 ($55,000 for 2018).
  • Elective Deferrals: $19,000 in 2019, or $25,000 if age 50 or older.
  • A business owner with no common-law employees doesn't need to perform nondiscrimination testing for the Plan.

Why go with a 401(k) Plan?

SEP & SIMPLEs are marketed as cheaper and easier because they are exempt from certain government reporting requirements, however, they lack the flexibility offered by a 401k Plan, which is particularly important to smaller or emerging/growing businesses. We find that businesses tend to quickly outgrow a SEP/SIMPLE Plan. If your workforce has grown, you’ll want the ability to put more restrictive eligibility and participation criteria in place. Another issue with SEP & SIMPLE Plans occurs when clients want to make a company contribution when the bulk of such company contribution should be allocated to owner accounts. You can allocate the majority of a company contribution to owner accounts, in a 401(k) Plan, but not a SEP/SIMPLE Plan. This is an important feature of a 401(k) Plan for business owners and executives.

Are there other options I should consider?

Obviously, every business is different. Just because a 401(k) Plan, SEP Plan, or a SIMPLE Plan works for one company doesn’t mean it will work for every company. Here are some other options you may want to consider for your small business:

Safe Harbor 401(k): This type of Plan is generally made available to all employees at least years old who have worked at least 1,000 hours in a previous year. Maximum contributions up to $56,000 in 2019 for employers, and up to $19,000 for employees (same as 401(k)s).

  • Permits high level of salary deferrals by employees without annual nondiscrimination testing.
  • Any employer with one or more employees is eligible.
  • Contributions through employee salary reduction and employer contributions.
  • Employee can decide how much to contribute based on a salary reduction agreement.
  • The employer must make either specified matching contributions or a 3% contribution to all participants.

Profit Sharing: This type of Plan is also generally made available to all employees at least 21 years old who worked at least 1,000 hours in a previous year. Maximum contributions for employers up to $56,000 in 2019.

  • Permits employers to make large contributions for employees.
  • Any employer with one or more employees is eligible.
  • Annual employer contribution is discretionary.
  • Employer makes a contribution as set by Plan terms.

Defined Benefit Plans: Available to all employees at least 21 years old who worked at least 1,000 hours in a previous year. Maximum contributions are determined annually.

  • Provides a fixed, pre-established benefit for employees.
  • Any employer with one or more employees is eligible.
  • Primarily funded by the employer.

401(k) Plans have become a widely accepted retirement savings method for small businesses but as you can see, they aren’t the only option. 401(k) Plans can vary significantly in their complexity, however, many financial institutions and other organizations, such as Leading Retirement Solutions, offer IRS pre-approved 401(k) Plans, which can greatly lessen the administrative burden of establishing and maintaining these Plans. If you’d like to find out more about Small Business Retirement Plans feel free to reach out to Leading Retirement Solutions. Or check out their helpful resources from the IRS.


By Ben Fisher at Leading Retirement Solutions

Ben Fisher is on the marketing team at Leading Retirement Solutions, a retirement Plan company that provides financial services for businesses of all sizes. Our team of highly trained and credentialed professionals provide a variety of services to our clients, including Plan design, Plan administration, and recordkeeping. Leading Retirement Solutions also provides tax sheltering and retirement savings solutions for business owners, investors and their family members.

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