Small Business Retirement Plans

The creation of the Simplified Employee Pension (SEP) and the Savings Incentive Match Plan for Employees (SIMPLE) affords smaller businesses with a way to offer their employees a retirement plan. The SEP and SIMPLE were designed for businesses with less than 100 employees and are less costly to administer than a 401(k). For the employees, they are both easy to understand and provide a convenient way to save for retirement. With regard to 401K, we can customize your plan to include profit sharing and cash balance plans to further increase owner contributions while reducing taxes.

As qualified retirement plans, SEPs and SIMPLEs enjoy the same tax treatment as other plans. Contributions by employees and employers are tax deductible or made on a pre-tax basis. The accumulation inside the accounts grows tax deferred. The many of the same restrictions apply as well. Withdrawals made prior to a certain age may be subject to a penalty.

As with all defined contribution plans, the future retirement benefit is uncertain as it depends on the amount of contributions, how long they accumulate, and the rate of return on the account over that period of time. At the time of distribution, withdrawals are taxed as ordinary income with no allowance for 10-year averaging as is available through a 401(k).

Simplified Employee Pension (SEP)

A SEP is easy to setup even easier to administer. Each employee established their own SEP-IRA to which the employer contributions are made. Although the employer is not required to make a contribution each year, when one is made it must be contributed to all employees over the age of 21, part-time included.

The employees manage their own SEP-IRAs which can be invested in mutual funds, money market funds, or fixed investments. The funds are always 100% vested so they can be accessed immediately by the employee (subject to an early withdrawal penalty). Employees with SEP-IRAs can also invest in their own traditional or Roth IRA subject to some income limitations.

For employers, their only responsibility is to make the contribution by their tax filing deadline. There is no administration of the accounts and there is no forfeiture provision to manage.

SIMPLE Plan

In a SIMPLE Plan, employees establish their own IRA to which they can electively make tax deductible contributions. Employees who earn at least $5,000 during any two prior years as well as the current year are eligible to participate on a voluntary basis.

Employee funds are 100% vested, however, in addition to the normal early withdrawal penalty, if a withdrawal is made within the first two years of participation, you incur an additional penalty unless any exceptions apply.

There is another version of a SIMPLE called the 401(k) version which is structured much like the IRA version. The advantage of the 401(k) version to the employer is that it can establish stricter requirements for plan eligibility which could reduce the amount of matching contributions. The disadvantage is that the same ERISA reporting rules apply to a SIMPLE 401(k) as they do the regular 401(k), so it can be more costly to administer.
 

401k, Profit Sharing and Cash Balance Plans

A 401(k) plan allows employees to contribute a portion of their salary on a pre-tax basis, helping them save for retirement while reducing their taxable income. Employers may also choose to match employee contributions, offering an added benefit to the workforce. Employee funds are vested over time based on the employer’s vesting schedule, which typically ranges from 3 to 6 years.

Profit sharing plans, on the other hand, offer employers the flexibility to contribute discretionary amounts to employee retirement accounts. Unlike 401(k) plans, where employees contribute their own money, profit-sharing plans are entirely employer-funded. These contributions can vary year to year based on company profits and are typically subject to a vesting schedule, ensuring employees remain invested in the company.

Cash Balance Plans combine features of traditional pension plans and defined contribution plans. They offer participants a guaranteed benefit at retirement, typically presented as an account balance. Employers contribute based on a set formula, often including both a percentage of salary and interest credits. Unlike 401(k) or profit-sharing plans, the contribution limits for Cash Balance Plans are much higher, allowing business owners or highly compensated employees to rapidly accelerate their retirement savings. Like other plans, contributions are tax-deferred, and participants receive annual statements showing their growing balance, providing a clear understanding of their future retirement benefit.

For additional information on small business retirement plans, contact us today.