Deciding which retirement plan is best for you and your business can be challenging. There are many different factors to weigh depending on your overall financial position. It is important to consider, how to start the plan, who the plan will cover, how much if any you plan to contribute, any tax advantages, and what additional recordkeeping or administrative cost is involved. Three of the most common plan types are, SEP IRA, SIMPLE IRA, and 401(k) plans.
The Simplified Employee Pension Plan, otherwise known as SEP plans , are available to sole proprietors, partnerships, S corporations, and C corporations alike. The plans are typically easy to set up and there are normally no maintenance fees or annual tax return filing for the plan. A maximum of 25% of annual compensation or $53,000 (whichever is less) is allowed for deferral in 2016. If the business has employees the same percentage of contribution must be made into any eligible employee accounts. Contributions can only be made by the employer and contributions are not required to be made every year. Contributions are 100% vested when made. The contributions are tax deductible by the employer and an additional tax credit up to $500 is available to small businesses to help offset any startup costs and is available for the first 3 years the plan is in place. The plan must be made available to all employees age 21 and older who have been employed by the organization for 3 out of the last 5 years and have had at least $600 in earnings. Withdrawals can be made at any time subject to early withdraw penalties and income taxes for individuals who have not yet reached 59 and ½ years of age.
The Savings Incentive Match Plan for Employees, Simple IRA, are available to all employers that do not offer any other type of retirement plan and with no more than 100 employees. The plan usually does have both participant and plan administration fees but these costs are minimal. Like the SEP, no annual tax return filing is required for this plan. Both the employer and employee can contribute to A Simple IRA. This type of plan must be offered to all employees with $5000 or more in earnings in any previous 2 year period and the current period. The employees decide how much to contribute through payroll deduction and can contribute a maximum of $12,500 to the plan for 2016 with a $3000 catch up amount for those who are 50 or older. Employers must make either a matching contribution of 100% of the first 3% of employee contributions or make a 2% contribution to all employees eligible for the plan even if they don’t participate. Employers cannot make any other discretionary contributions outside these two options. As with the SEP, contributions are 100% vested when made. Employer contributions are tax deductible and the startup and administrative costs are also eligible for the small employer tax credit mentioned above. Similar to the SEP, withdrawals can be made at any time subject to early withdraw penalties.
If an IRA based retirement plan is not for you, a 401(k) plan may better meet the needs of your business. There are three types of 401(k) plans and are available to all employers with at least one employee, including the business owner. The types are Safe Harbor 401(k), Automatic Enrollment 401(k), and Traditional 401(k) plans. The startup costs and administration fees are higher for 401(k) plans compared to IRA plans and an annual tax filing of form 5500 is required. It is recommended to seek advice from a financial advisor when setting up a 401(k) plan as they are much more complex than the SEP or SIMPLE plans. The contribution rules are slightly different for the 3 types. Not all require employer contributions, however all three types have a combined annual employee and employer contribution limit of $53,000. Employee contributions cannot exceed $18,000 for 2016 with an additional $6000 catch up amount allowed for those 50 or older. Employees 21 and older with at least 1000 hours of service in the prior year must be allowed to participate in these plans. Employee contributions are 100% vested but employer contributions typically vest over time. Withdrawals can only be made when certain events occur such as job or plan termination, certain hardship circumstances, and retirement. 401(k) plans allow employee loans against the plans that are paid back over a specified time with a pre-determined interest rate.
This is only a brief overview of the options available. If you are in need of a retirement plan for yourself or your employees, please contact your financial advisors for help in deciding which plan is best suited for your needs.
Michelle is a Staff Accountant at Gamwell, Caputo, Kelsch & Co., PLLC in Conway, NH and can be reached at 603-447-3356. Michelle welcomes any article feedback or questions for future article consideration.