Which Retirement Plan is Right for my Business?

Deciding which retirement plan to choose and then implementing it can seem like a daunting task, but with some guidance and an action plan it can be much less intimidating.  And having a retirement plan for your business can help you save for retirement tax efficiently, and even help you retain talent.

When deciding on a retirement plan for your business, here are some things to consider.

How much can my business afford to contribute?

Different plans have different allowed and/or required contributions.

A simplified employee pension plan (SEP) is only funded by employer contributions, not employees. SEP contributions are made to separate IRAs for eligible employees.

Savings Incentive Match Plan for Employees of Small Employers (SIMPLE) IRAs mix both employer and employee contributions. Some employers may provide a 100% match for employee contributions up to first 3% of compensation.  Others may contribute 2% of each eligible employee's compensation, regardless of how much that employee contributes. It's up to the employer to decide which works best for their business.

A 401(k) is primarily funded by the employee; the employer can choose to make additional contributions, including matching contributions.  If the employer chooses to make a safe harbor match, typically a 100% match on the first 3% of the employees contributions and a 50% match on next 2%, for a total match of 4% if the employee contributes at least 5%.

What plan accommodates high employee turnover?

Different plans may allow for more strict or more lenient vesting and eligibility. This can help manage the cost of high employee turnover.

If you choose a SEP-IRA, you only must cover employees who are: 1. At least 21 years old. 2. Earn at least $650. 3. Have been employed in three of the last five years.

If you decide on a SIMPLE IRA, you must cover employees who are expected to earn $5,000 in the current year, and have earned at least $5,000 in any prior two years.

With a 401(k) or defined benefit plan, you must cover all employees who are at least 21 years of age.  And have either worked 1,000 hours in a single year or have worked at least 500 hours a year for three years in a row.  Employee deferrals are 100% vested, however a vesting schedule may apply to 401(k) employer contributions and defined benefits.

Do I want to maximize contributions for myself and my spouse?

Typically, 401(k) and SEP-IRA have higher contribution maximums than the SIMPLE IRA. For those business owners who are significantly older than their other employees, a defined benefit plan may offer an even higher levels of possible contributions.

Which plans are easy and inexpensive to administer?

Both the SEP-IRA and SIMPLE IRA are straightforward and simple establish and maintain. The 401(k) can be more difficult, but much of the complexity of onerous testing may be eliminated by using a Safe Harbor 401(k). Generally, the defined benefit plan is the most complicated and expensive to establish and maintain of all plan choices, but in specific circumstances can provide the most opportunity for tax deferral.

The world of business retirement plans is a complicated and nuanced one. We have a team of  CERTIFIED FINANCIAL PLANNER™, Linus Whitlock and Logan Whitlock. If you would like a no cost, no obligation second opinion on your retirement plan, give us a call or email and we can talk about your personal situation.