Which retirement plan is best for your small business?
According to a government study of businesses with 100 or fewer employees, only about 14 percent offers some type of retirement benefit.1 If you're in the 86 percent that doesn't offer a retirement plan, you may be missing an opportunity to stand out from your competitors and attract and keep qualified employees.
While 401k plans are the most common and well-known type of retirement plans, they’re not always the best option for smaller companies. Fortunately, small companies can do right by their employees—and their business—with two other types of retirement plans, which are ideal for very small businesses, typically 10 employees or less.
SEP IRA: A Simplified Employee Pension (SEP) IRA works well for sole proprietors and small companies because the initial set-up costs are typically low, and an SEP IRA is relatively easy to establish and maintain.2
- Contribution limits: Contributions are made only by the employer and are tax deductible as a business expense. The employer can contribute up to 25 percent of employee compensation, or up to a maximum of $54,000 per employee (as of 2017).3 The employer must contribute the same percentage to all eligible employees that he contributes to his own account. However, employers do not have to contribute every year.
- Who is eligible? Your SEP plan must include any employee who has worked for the company for at least three of the last five years and received at least $600 in compensation in the current year. However, you can establish less restrictive requirements if you want, such as including employees who have worked for your company for only one year.4
- Is it portable? Yes. If an employee leaves the company, he may rollover his SEP contributions and earnings tax-free to his other IRAs and retirement plans.
SIMPLE IRA: A Savings Incentive Match Plan for Employees (SIMPLE) IRA is ideal for small companies because it has lower contribution requirements than other retirement plans.
- Contribution limits: Similar to a traditional 401(k) plan, a SIMPLE IRA is funded by tax-deductible employer contributions and pretax employee contributions. There is a mandatory business contribution of either: a 100 percent match on the first 3 percent deferred (match may be reduced to 1 percent in two out of five years) or a 2 percent contribution on behalf of all eligible employees.5 Employees can contribute up to 100 percent of their compensation through salary deferral, not to exceed $12,500 for 2017.
- Who is eligible? Your SIMPLE IRA plan must include any employee who earned at least $5,000 in compensation during any two years before the current calendar year and expects to receive at least $5,000 during the current calendar year.6 You can implement less restrictive eligibility requirements, but not more restrictive ones.
- Is it portable? Yes. Employees that leave your company may rollover the assets in their SIMPLE IRA to any other type of retirement account, such as a traditional IRA, SEP IRA, 401(k), etc.
Offering a retirement plan is an excellent way to contribute to employee satisfaction, recruit competitively, reduce your taxes and provide security for your own future as well as the future of your employees. To choose the right plan for your business, research the various options available and talk to a professional for more guidance about which works best for your priorities.
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