What Retirement Plans Can a Small Business Offer?

Are you struggling with trying to keep top employees from fleeing for big corporate perks? Choosing the right retirement plan is one way you can match the giants with minimal extra costs. Here are your options.

Small Business 401(k)

A small business 401(k) is legally the same as a big corporate 401(k). The only distinction is that some 401(k) providers streamline the process to help make it easier for small businesses to set up a plan.

Benefits:

  • Higher contribution limits.
  • Flexibility to offer different compensation packages to different employees. (Some restrictions apply that keep owners or highly compensated employees from getting all the benefits.)

Disadvantages:

  • Typically higher management fees and setup costs.
  • Increased IRS reporting requirements.
  • May be less flexible if employees need to withdraw funds early.
Contribution limits:
  • Employees can contribute up to $18,000.
  • Employers can contribute a fixed percentage and/or match employee contributions up to $54,000, in combined employer plus employee contributions.
  • Employees age 50 and older can contribute an additional $6,000 in catch up contributions.

SIMPLE IRA

SIMPLE stands for Savings Incentive Match PLan for Employees. SIMPLE IRAs are available to businesses with 100 or fewer employees.

Benefits:

  • Cookie-cutter setup that’s easier to manage.
  • Often has lower setup and management fees.
  • Works like a Traditional IRA for early withdrawals or rollovers.
Disadvantages:
  • Lower contribution limits.
  • Rigid contribution rules.
Contribution limits:
  • Employees can contribute up to $12,500 ($15,500 if 50 or older).
  • Employer Option 1: Match up to three percent of employee contributions with a $12,500 cap. The percentage can be reduced as low as one percent in any two out of five years.
  • Employer Option 2: Contribute two percent of each employee’s compensation regardless of their contributions with a $5,400 cap.

SEP IRA

SEP stands for Simplified Employee Pension plan. SEP IRAs are available to employers of any size.

Benefits:

  • Fewer IRS reporting requirements than a 401(k).
  • Higher employer contribution limits.
  • Often has lower setup and management fees.
  • Works like a Traditional IRA for early withdrawals or rollovers.
Disadvantages:
  • No additional employee contributions.
  • Most SEP plans require the same contribution percentage for all employees.

Contribution limits:

  • Employer contributions of up to 25% of compensation. Maximum contribution of $54,000.
  • Some plan providers allow employees to put their personal IRA contributions into a combined account with their SEP IRA contributions for ease of management. If this is allowed, employee contributions are treated as regular Traditional IRA contributions with the usual $5,500 limit.

Ask your advisor for more information about these options today. It’s a great way to boost employee morale and retention with minimal impact on your cash flow.

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