Small Business

Small Business Guide to Selecting a Retirement Plan

If you're self-employed or run a small company, it can be overwhelming to try and figure out what retirement plan would be best for you and your company. 

Use the graphic below to help you get an idea of which plan may be right for you.

Infographic based on the  American Funds  question guide

Infographic based on the American Funds question guide

Keep in mind that the graphic above does not include every single option available to employers, nor is it a definitive guide to selecting a retirement plan. The graphic above merely helps you to begin the conversation on choosing a retirement plan with the right questions.

Below is a brief overview of each of the different plans mentioned above. All of the following plans have the same tax status of contributions, meaning that your contributions are tax-deferred (up to certain limits).

SIMPLE IRA

Eligibility: Any employer with 100 or fewer employees that does not maintain another retirement plan.

Key Advantages: This plan allows for direct salary reductions with less administrative burden. It is also typically one of the least expensive plans to set up and maintain.

Who Contributes and What are the Limits?: Both the employer and the employee contribute to this plan. The employee funds the plan directly through a salary reduction. The employer is required to contribute either: 1) a 100% match of up to 3% of employee salary contributions (match can be reduced to 1% in 2 of 5 years), or 2) a 2% contribution for all eligible employees, whether they contribute to the plan or not.

The maximum contribution for this plan is $12,500 for 2017, plus a $3,000 additional for those that are age 50 and over (2017). 

Administration: By doing one of the two required options above, it removes all requirements for costly audits of the plan (top-heavy testing, highly compensated employee identification, etc.). There are also no annual filing requirements from the plan (form 5500) as with a 401(k), which brings down the plan cost and administrative burden of the plan. The employees are always 100% vested in both their contributions as well as the contributions of the employer.

Key Disadvantage(s): The SIMPLE IRA has lower contribution limits when compared to a 401(k) or a SEP IRA for employees of higher income levels ($60,000+).

SEP IRA

Eligibility: Any employer with one or more employees. 

Key Advantages: This plan is easy to set up and maintain. It is typically a more popular option with sole proprietors due to its higher contribution allowances for those with higher levels of income.

Who Contributes and What are the Limits?: The employer is the only one who can contribute to the plan.

The employer can contribute the lesser of 25% of employee compensation or $54,000 to the plan (2017). The employer must contribute the same percentage to employee accounts in each year that a contribution is made to their own account. 

Administration: There are no annual filing requirements (form 5500) on behalf of the plan. The employees are always 100% vested in both their contributions as well as the contributions of the employer. 

Key Disadvantage(s): A disadvantage of the SEP is that only the employer can only contribute to the plan, not the employees. The employer must also contribute the same percentage of contribution for their employees that they do in their own account (ie. if the employer contributes 15% of their own salary to the plan, they must also contribute 15% of each employee's salary to their plan as well).

Payroll Deduction IRA

Eligibility: Any employer with one or more employees.

Key Advantages: Easy to set up and maintain. No required employer contributions.

Who Contributes and What are the Limits?: The employees are the only ones who can contribute. They contribute via payroll reductions. 

Employees can contribute up to a maximum of $5,500 per year, plus an additional $1,000 if they are age 50 or older (2017).

Administration: There are no annual filing requirements for the plan. The only administration of the plan is the payroll deduction.

Key Disadvantage(s): This plan has the lowest contribution limits of all the plans. It also does not allow for employer matching.

401(k)

Eligibility: Any employer with one or more employees.

Key Advantages: This plan permits a high level of salary deferrals by employees. This plan also offers the most customization, with many different features (loans, vesting, matching, profit sharing, Roth capability, etc.). 

Who Contributes and What are the Limits?: Both the employer and employee can contribute to the plan. The employer is not required to contribute to the plan, but if no safe harbor contributions are made, the plan must undergo annual nondiscrimination testing.

Employees can contribute up to $18,000 via salary deferral, with an additional $6,000 if they are age 50 or older (2017). The employer can match up to 25% of employee compensation, but the combined employer and employee contribution cannot exceed $54,000 (excluding over age 50 catch-up contributions).

Administration: Annual nondiscrimination testing is required. For 5500 must be filed each year for the plan. A Third Party Administrator (TPA) is typically required for most 401(k) plans.

Key Disadvantage(s): 401(k) plans are typically the most expensive and complicated to administer. With greater customization comes greater cost and administration.

Solo 401(K)

Eligibility: Self-employed individuals or business owners with no other employees other than their spouse.

Key Advantages: This plan has all the advantages of a standard 401(k) plan. It has the added benefit of not having to conduct nondiscrimination testing for the plan as long as the business owner does not have any employees. 

Who Contributes and What are the Limits?: Both the employer and employee can contribute to the plan, assuming that the employee is the business owner or their spouse. 

The combined employer and employee contribution cannot exceed $54,000 just as in a standard 401(k) (excluding over age 50 catch-up contributions).

Administration: Form 5500 must be filed annually once the plan exceeds $250,000 in assets.

Key Disadvantage(s): Comparatively, these plans are typically more expensive for individuals looking to set up a retirement plan up for only themselves.

 

In short, there are many retirement options available to small businesses. It can be overwhelming trying to navigate the decision by yourself. It is worth taking the time and effort to evaluate your options and choosing a plan that fits your company like a glove. Doing so can save you a significant amount of money and headaches down the road.

 

Need help selecting a retirement plan for your small business, or evaluating an existing one? Let us know!

We can benchmark your plan with comparable ones on the market, as well as determine if your current plan is the right solution for you.

 

 

Resources:

 

IRS Small Business Retirement Plan Resources

DOL Guide to Choosing a Retirement Plan for Your Small Business