Small Business Retirement Plans-
As a small business owner, you may decide to offer the benefit of a retirement plan to your employees as one of several strategies to obtain and retain the best workers. There are a number of options available, including Simplified Employee Pension (SEP) plans, Savings Incentive Match Plans for Employees (SIMPLE) Individual Retirement Account (IRA) plans and 401(k) Plans. The plan you ultimately choose depends largely on the particular circumstances of your business – there is no one-size-fits-all solution.
SEP plans are entirely employer funded. As an employer, you may determine how much to contribute. The maximum contributions to SEP plans vary annually; for 2012 the limit is 25 percent of an employee’s salary or $50,000 US, whichever is less. SEP plans do not allow catch-up contributions for older employees.
Setup for SEP plans is simple, and any employer with one or more employees is eligible to set up SEP plans. Once the plan is established, employers must offer SEP plans to all employees over age 21 who have been employed with the company for three of the past five years and met a minimum salary threshold, which was $550 for 2010 and 2011.
If you have 100 or fewer employees and you wish to establish a retirement plan that allows both employer and employee contributions, a SIMPLE IRA plan may be a good option. For 2012, each employee’s plan may be funded up to 100 percent of his or her compensation or $11,500 US, whichever is less. Plans for employees over 50 may be funded up to $14,000 US for 2012. You must make matching contributions of up to three percent of the salaries for all employees who make contributions to their SIMPLE IRA funds, or two percent of compensation for each eligible employee.
If you elect to establish a SIMPLE IRA, you must do so before October 1 of each year; other retirement plans generally have a deadline of December 1 of each year. You must establish a SIMPLE IRA for each of your eligible employees. Employees are eligible if they have earned at least $5,000 US any two prior years, and expect to earn the same amount during the present year.
For the most possible flexibility in retirement plan offerings, many employers turn to 401(k) plans, which allow both employer and employee contributions. Employees contribute to 401(k) plans through salary deductions. Many 401(k) plans draw on pre-tax earnings, which means that employees don’t pay tax on their 401(k) contributions until they make withdrawals, however, post-tax contributions may also be allowed. Employers may opt to match employee contributions or allow employees to fund their 401(k) plans without employer contributions.
If you opt for a 401(k) plan, you must extend offers to all employees who are at least 21 years old and who worked at least 1,000 hours in the previous year. Unlike other retirement plans that vest immediately, you may opt to defer full employee vesting, as long as the period is the same for all employees.
For Further Reading
From the Department of Labor
From the IRS:
- How to Choose the Right Small Business Retirement Plan
- Is Your Retirement Plan Right for Your Small Business?
- The Skinny on Defined Contribution Plans
- SEP IRAs a Step Up from Some Other Plans
- Small Business Retirement Plans
The above content represents descriptions of employer-sponsored various retirement plan options available to small business owners. It does not represent financial advice. Consult with a financial planning professional about specific questions you may have about employer-sponsored retirement plans.
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