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Does Your Business Offer a Retirement Plan?

How is your business set for funding your retirement plan and the retirement plans of your employees? This can be a solid benefit for employees, but what is the right instrument for your situation?

We work with several IRA-based plans, including Payroll Deduction IRAs, SEP, and Simple IRAs. There are also 401(k) Safe-Harbor plans that allow for profit-sharing contributions. If you are thinking about adding retirement savings as a benefit to your employees, this should help you weigh your options. If you are already providing retirement savings plans, this is a good refresher.

Plan Structure Analysis

What is the best plan for your workplace? There are many factors to consider

Let’s look first at your IRA options.

Payroll Deduction IRA

  • Easy to set up and maintain
  • Available to employers with one or more employee
  • Max contribution of $5,500, with an extra $1,000 for employees 50 years or older
  • Employee contributions only
  • Contributions are immediately 100% vested

SEP IRA

  • Easy to set up and maintain
  • Available to employers with one or more employee
  • Max contributions of 25% of compensation, up to $57K in 2020
  • Employer contributions only
  • Contributions are immediately 100% vested

Simple IRA

  • Little paperwork involved
  • Available to employers with 100 or fewer employees
  • Employee and Employer contributions
  • Employees can defer salary into Simple IRA up to $13,500 in 2020
  • Employees over 50 can defer an additional $3,000
  • Employers can either match employee contributions 100% of the first 3% of compensation (can be reduced to as low as 1% in any 2 out of 5 yrs.) or contribute 2% of each eligible employee’s compensation

Safe Harbor 401(k)

  • Employee max contribution of $19,500 for 2020
  • Employees over 50 can contribute an extra $6,000
  • Employee can decide how much to contribute based on a salary reduction agreement
  • Employer must make either specified matching contributions or a 3% contribution to all participants.

Automatic Enrollment 401(k)

  • Employee max contribution of $19,500 for 2021
  • Employees over 50 can contribute an extra $6,500
  • Employees, unless they opt otherwise, must make salary reduction contributions specified by the employer
  • Employer can make additional contributions, including matching contributions as set by plan terms

For most small businesses with more than 3-5 non-family employees the choice really comes down to a SIMPLE IRA or Safe-Harbor 401(k).  Both are great options depending on cash-flow, age, and goals.  If you want to schedule a free 15-minute call to talk through these schedule a chat here.

Profit-sharing and defined benefit plans are much looser in structure. Here are a few highlights about how to put either of these in place for employees

Profit-Sharing

  • Contribution by the employer is discretionary
  • Employer can deduct amounts that do not exceed 25% of aggregate compensation for all participants
  • Contributions from employer and employee of up to $57,000 in 2020
  • Employees over 50 can contribute an extra $6,500

Defined Benefit Plans

  • Contributions determined by plan terms
  • Payment of benefits after a specified event occurs (retirement, plan termination, etc.). The plan may permit loans, early withdrawals subject to an additional tax.

Advantages

Employees obviously like the tax-deferred growth of the contributions over time, along with the tax deductions they can take on annual contributions each year they are made.

For you as an employer, the better the retirement plan, the more incentive good employees have to stick with you.

Which plan is right for you and your employees? Let’s set up a meeting and talk about it.