Consider options in choosing a retirement plan

Jaime Martinez
Jaime Martinez

Creating an effective retirement program that meets the needs of employees and owners is a complex issue. Not only are such business strategies as attracting and retaining qualified employees involved, but so are host of complex tax rules. To complicate matters even more, there’s often a significant need for business owners to maximize their own savings in preparation for retirement.

While there are many different retirement plan choices out there, some are specifically designed for small businesses. Here are three options to get you started:

A Simplified Employee Pension (SEP) plan is a tax-deferred retirement plan that’s often set up by sole proprietors or small businesses. This plan allows for employer contributions only and the employer can decide whether to make contributions year to year.

Here are a few advantages and disadvantages of SEPs:

SEPs have a significantly lower setup cost and require less paperwork than many other plans.

No annual filing requirement for the employer.

If you have employees, you could have to make contributions to their accounts as well as your own.

The retirement benefits in a SEP are fully vested as soon as they’re contributed, which means they’re completely portable. This could be a negative for business owners because departing employees can roll their SEP balances into an IRA or have them transferred to a retirement plan sponsored by new employers.

Doesn’t allow for participant loans, but does allow for in-service withdrawals.

Maximum contributions are 25 percent of compensation for employees or 20 percent of self-employment income for sole proprietors, partners and LLC members. The absolute maximum amount that can be contributed to an account and deducted is $52,000 for the 2014 tax year ($53,000 for 2015).

A Savings Incentive Match Plan for Employees (SIMPLE) individual retirement account is an option for any employer with 100 or fewer employees that doesn’t maintain another retirement plan. This plan requires employer contributions and allows for employee salary reduction contributions. The employer can choose to make a matching contribution or nonelective contribution. The matching contribution requires the employer to match each employee’s salary reduction contributions dollar-for-dollar up to 3 percent of compensation. The nonelective contribution requires the employer to contribute 2 percent of each eligible employee’s compensation even if the employee chooses not to make any salary reduction contributions.

Here are a few advantages and disadvantages of SIMPLE plans:

Fairly easy and inexpensive to set up with relatively little administrative paperwork.

No annual filing requirement for the employer.

Employee is 100 percent vested in all contributions.

Less flexibility in contributions, including lower contribution limits.

Doesn’t allow for participant loans, but does allow for in-service withdrawals.

The maximum employee contribution is $12,000 in 2014 ($12,500 in 2015). Participants age 50 or over can make additional catch-up contributions up to $2,500 ($3,000 in 2015).

A 401(k) plan is available for any employer with one or more employees. This plan is a type of defined contribution plan, allowing for employee salary deferrals and/or employer contributions.

Here are a few advantages and disadvantages of 401(k) plans:

Greater flexibility in contributions, including higher contribution limits.

Employees are 100 percent vested in their salary deferrals. Employers can select from two vesting schedules for employer contributions.

Allows for participant loans and in-service withdrawals.

More costly to set up and administer.

Annual Form 5500 filing requirement for the employer.

Could be subject to audit requirements if plan is considered a large plan.

Maximum employee salary deferral is $17,500 ($18,000 in 2015) with a catch-up contribution of $5,500 ($6,000 in 2015) for participants age 50 or over.  Combined employee and employer contributions are limited to the lesser of 100 percent of an employee’s compensation or $52,000 for 2014 ($53,000 for 2015), not including catch-up deferrals.

 Selecting the right plan for you and your business is a complicated and important process. There are many matters to consider in designing a retirement program, including cost, filing requirements, legal compliance and tax ramifications.

To learn more about small business retirement plans and which option could be best for you and your business, consult your team of advisors.