Thank you for tuning into Retirement Plan Consultants YouTube channel. This recording is specifically on small business retirement plan considerations.
So your business may be relatively small in size, but you no doubt realized just like the big guys do, that having a retirement plan for your employees can be an attractive benefit.
This presentation is a brief overview of the advantages of an employer-sponsored retirement plan and some options to think about.
So, why sponsor a retirement plan?
Just as I stated before, it is an attractive employee benefit. Depending on your industry or where you’re located, you may need to have some sort of employee benefit plan. Somewhere that these employees can defer money into or maybe reach a match or something along those lines. Other things a company sponsored plan can improve both their employee job satisfaction as well as their productivity.
In addition, a tax qualified retirement plan offers tax advantages both to the employer and to the employees. For example, employer contributions to these plans are deductible. This is something you may want to talk to your tax advisor or your CPA to see if there is this would make sense in your return. And then finally, there is a tax credit available for small employers who start a qualified plan. There is a tax credit in the form that you can file with our return for the newly eligible plan, which definitely something think about as well.
What are your next steps?
Say you see that these benefits are here and put them into play. “Yes it’s something I’m interested in.” There are a number of choices when it comes to choosing a retirement plan. Some types of plans carry a heavier administrative burden than others because they take a little bit more time. And some are super simple to manage.
Two types of Retirement Plans for Small Business Owners
First one up on there is the profit sharing plans. These profit-sharing plans offer a great deal of flexibility. The sponsoring business can include a formula in the plan to determine an annual plan contribution or contributions can be made at the discretion of the employers governing bodies. Let’s say they have a board of directors for example. There are quite a few different formulas you can put into play.
One is pro rata.
So, you can say to anybody that’s eligible, we’re going to give them a four percent profit sharing. Again, remember that this is a discretionary contribution. So, if the business is luggage in any given year, you don’t necessarily have to make any contribution for that year. Again, pro rata is just one option.
There are a couple other options that may benefit your organization. One, for example, they have this thing called new comparability. What this does is it maximizes the owner’s contribution.
So, there’s a lot of neat things that you can do with the profit sharing plans. Again, it is a discretionary contribution. So, if you’re sluggish, you don’t necessarily have to contribute. However, some employers do choose to use this profit-sharing to tie to a positive incentive for employees to work harder and smarter. So, if you are open with your employees about the profitability of the company, you could say “if we make X profit, we will give you X percentage profit-sharing” to everybody in their qualified plan. That really does encourage employees to work harder, smarter, and more efficiently.
401K Salary Deferral Plan
The next option here on this slide is a 401k salary deferral plan. Again, I’m just talking about 401k’s here, but if you qualify for as a non-profit or maybe a church or school or something like that, there are also have 403b plans, so just contact us on those sorts of questions.
But salary deferral plans are a very effective way for employees to save for retirement. Basically, employees differ a portion of their paycheck to their retirement plan before taxes and those would be their pre-tax contributions. Then, you as an employer can choose to either match some of it or all of it.
So, for example, you could choose to match a hundred percent, down to four percent. So, what you’ll most likely see is your employees deferring four percent to get that four percent match.
If you want to incentivize them to differ more, you could say “I will match fifty percent, up to eight percent”, which means they would have to give eight percent from their paycheck in order to get half of that in order to get a four percent match. So there’s this and other really neat things you can do with salary deferral and adding that match contribution on to it.
Another option is to also add a roth feature into the plan. So, employees who make those roth contributions, they will defer their contributions after tax as a designated roth, then those contributions and any related earnings after they have met tax law requirements.
There’s a couple of requirements, but they would be able to distribute those funds tax-free. So, not only because they already paid the taxes in the front, they would get those earnings tax-free as well.
So, there’s a couple different options with the deferral. Those are a couple of the qualified plan scenarios. If you don’t necessarily want to dive into the qualified plan scenarios, maybe again you don’t want to have to deal with a plan document, you could move down to the IRA route.
Many employers, especially your small employers, they may start off with a step or simple plan start things off. Then, as they grow, they move into a 401k. Everybody’s situation is very different.
Simplified Employee Pension Plan
So, the simplified employee pension plan, which is a step up, has this is option for small businesses to, in essence, to set up an individual retirement account or an IRA for each participating employee. Then the employer can make deductible contributions if the total contributions don’t exceed the IRS limits each year. The IRS pushes out certain limits. It’s very similar to a profit-sharing plan like the pro rata situation that I had gone over. Annual contributions to the SEP are not mandatory.
It is a simple approach, but don’t confused it as the next option, called a simple plan. It offers it typically offers low startup costs, minimal reporting, and record-keeping requirements and there’s some flexibility adding those annual contributions. That might be a good option for you and it does not allow for employees to defer or put away their own money into the plans, its solely just employer driven. So, if you are interested in the IRA option where the employees can defer, there is a simple plan.
Simple stands for Savings, Incentive, Match PLan for Employees. It’s very common for small businesses. This type of plan can be established as an IRA for each employees, similar to the SEP. The set of procedures and administrative requirements are pretty straight forward.
Both employees and employers can make contributions under a simple plan. The employer generally must match each participating employees contribution up to a certain level of compensation. So, you can define what their compensation is, possibly excluding bonuses or something like that, or contribute to a minimal amount called a melon elective to all employees whether they contribute to the plan or not.
So, with the simple, as the employer, you are going to either have to give a match of a certain percentage or, if you don’t want to give a match, you have to give a non-elective.
A non-elective is giving to everyone, even if your employee, ‘John Doe’ would choose not to defer.
So, that’s a simple plan. One thing to note with simple plans is if you’re an employer with more than 100 eligible participants, a simple is not an option. You’re going to have to choose a 401k or 403b depending on is appropriate for your organization.
Final Thoughts on Retirement Plans for Small Businesses
So, I know I gave a quick rundown, but if you’re an owner of a small business and thinking about adopting a retirement plan as we showed here, you have quite a few different options.
We are experts in this arena and we can help you figure out what makes the most sense for your organization.
Our email address is up on the screen there (Admin@Retirementplanconsultants.Net) and our toll-free phone number (855-858-5189).
We also have fax (402-379-3818) and mail:
Retirement Plan Consultants
PO Box 1264
Norfolk, NE 68702
if you’d prefer a fax or mail communication as well. We look forward to hearing from you and working with you in the future.