Small Business Retirement Plans
Having a small business and wanting to offer some sort of employee incentive to keep them is always something to consider. Many small business owners are looking to add a retirement plan to their benefits package, but which one? There are several options, and it isn’t always easy to decide which small business retirement plan will work best for your particular business. Many of the financial advisors that try to sell these retirement plans to business owners aren’t really on the level as to which plan is best for YOU, but more into what will make them the most money. Often times they don’t even know what other plans are out there!
In this article I want to give you a bit of an early look on what small business retirement plans are out there and help give you a bit of knowledge on the subject before you just go with whatever plan is presented to you. I will go in depth on each plan in further posts, and will link each of them here so you will have easy access. Here I just want to point out the basic plan parameters since each plan has much more information than this post can hold.
As a business owner myself, I know that there are plenty of other business owners that don’t want to appear as if they are clueless about anything. Don’t be that guy. Ask questions, do some research, and don’t pretend to know about things that are outside of your knowledge base.
Small Business Retirement Plans Quick List
Simplified Employee Pension Plan (SEP IRA)
Elligibility: Any business.
Contribution Limits: 25% of compensation (if you’re an employee of your own corporation) up to $45,000; 20% of self-employment income (if self-employed) up to $45,000. Employees cannot contribute. But the employer must contribute to eligible employee accounts the same salary percentage they contribute to their own.
Vesting: Immediate.
Pros: Contributions do not have to be made every year. Very easy and cheap to set up and administer. Immediate vesting for the employee.
Cons: Must cover all qualifying employees. Employees cannot contribute. Vesting is immediate.
Savings Incentive Match Plan for Employees (SIMPLE IRA)
Elligibility: Employers with 100 employees or less who do not maintain any other retirement plan. All employees who have ever earned more than $5,000 in any two years prior and who will earn at least $5,000 this year.
Contribution Limits: 3% employer match (in certain situations, the match can be 1% to 2%) or 2% non-elective contribution for all employees up to $4,500 per employee. Employees can contribute up to $10,500 plus employer match up to 3%. (Employer can contribute $10,000 plus match to their own account.) Additional $2,500 if you are age 50 or older as of 12/31/07.
Vesting: Immediate.
Pros: If you have lower salary (or self-employment income), you can make larger contributions than under other types of plans. Employees can contribute.
Cons: Employer most likely cannot contribute as much as she can to a SEP IRA. Match is mandatory. Vesting is immediate. Unless the employee has a high income that would allow them to contribute more in another type of plan, they have no real cons in this type of plan.
Profit Sharing Plans
Elligibility: Any business. Employees who worked at least 1,000 hours in past year; two years, if no vesting period.
Contribution Limits: 25% of salary (20% of self-employment income) up to $45,000. No employee contributions.
Vesting: Determined by business owner.
Pros: Contributions can vary from year to year.
Cons: Administration fees may be expensive. Plan typically will need to be managed by a pro. No employee contributions.
401(k)
Elligibility: Any business. Employees who worked at least 1,000 hours in the past year; two years, if no vesting period.
Contribution Limits: Combined employer and employee’s contribution cannot exceed $45,000 ($50,000 if you are 50 or older). Employee contributions of $15,500 ($20,500 if you will be age 50 or older as of 12/31/07.)
Vesting: Determined by business owner.
Pros: Employee/employer contributions. Employers are not required to match contributions. Employees will be able to contribute, and will typically have some say as to what they will be invested in.
Cons: This plan can be quite expensive for smaller businesses due to administration fees. Employees may have a vesting period for the employee contributions.
Defined Benefit Plan
Elligibility: Any business owner or self-employed individual can create this plan. Employees who worked at least 1,000 hours in the past year; two years, if no vesting period.
Contribution Limits: No set limit. Contributions are based on actuarial assumption. Maximum annual retirement benefit is $180,000 or 100% of the participant’s average compensation for his highest three consecutive earning years.
Vesting: Determined by the business owner.
Pros: Older employers looking to put away a lot of money over short time period can do so. This can be a major benefit if you have reinvested all your profits back into the business to build it. When you have put yourself in a position to have extra money to save for yourself this plan can help you save a very large amount of money in a short time. Employees will be guaranteed a set payout upon retirement.
Cons: Not much flexibility. The plan could be very expensive as well depending on how it is set up. No employee control over investment options. No employee contributions. Vesting takes years in most plans.