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Retirement Plans for Small Business

October 16th, 2011 by

Small business retirement plans are recognized by the Internal Revenue Service as a means to help employers and employees save toward retirement. It must adhere to the guidelines created by the Employee Retirement Income Security Act that sets a standard of conduct for
employers in managing assets and maintaining a fiduciary responsibility over those assets. There are many retirement plan options available for a small business depending on how many employees the company retains.

A small business employer can explore a variety of retirement plans for himself and their employees. The plan is relative to the size of the business, the number of employees and the expenses related to establishing and maintaining a plan. Employers should examine what they hope to accomplish in a retirement plan and review how each specific plan can meet those objectives.

IRA

The payroll deduction Individual Retirement Account can be set up as a traditional or Roth IRA for employees. This retirement savings plan funded through elected salary reductions through payroll services.  Employees may contribute up to $5,000 annually ($6,000 if you are over age 50).  There are no costs to the employer in this type of plan unless the employer elects to pay the annual custodial fees per IRA account.  These fees would be a tax-deductible expense. Payroll Deduction IRAs are available to small businesses with one or more employees.

Self Employed Pension Plan

A Self Employed Pension Plan allows employers to set up an IRA on behalf of qualified employees. The employer makes contributions to the IRA; employees make no contributions. Based on 2010 IRS regulations, SEP IRA contributions are capped at $49,000 of annual income. All contributions and expenses are 100 percent tax deductible to the employer. Eligible employees for a SEP plan are 21 years of age with a minimum of $500 income from the employer with at least three of the past five years of service.

Savings Incentive Match Plan for Employees

SIMPLE IRA Plans are designed for the small business with 100 employees or less. A SIMPLE plan is easier to establish than a 401k plan with fewer costs but employees are able to make salary reduction contributions. Employers can make up to 3 percent of the employees salary as matching contributions. Employers may also choose non-elective contributions to all qualified employee accounts. Employer contributions are 100 percent deductible and fully vested in the IRA account established on behalf of the employee.  Employees may contribute up to $11,500 annually with employers contributing up to $2,500 annually.

401k Plan

The 401k plan is an attractive program for small business owners who want to either save more toward personal retirement or attract and
retain higher quality employees. The Internal Revenue Service allows employees to make up to $15,500 in tax-deductible salary deductions into the 401k plan with employers able to match up to 3 percent of income. Employees may make non-deductible contributions capped at $49,000 or 100 percent of annual income.  The downside to a 401k plan is added administration fees and reporting.

How to Establish a Small Business Retirement (Example)

Step 1

Review the options available to you with a tax adviser. The most common small business retirement plans are SEP Individual Retirement Accounts, SIMPLE IRAs and 401k plans. Be sure to review the costs associated with each plan and the tax savings that could benefit your business bottom line. SEP IRAs are “Simplified Employee Pension” plans that generally have lower costs than other more complex plans. In these plans, the employer sets up IRAs for employees and makes contributions on their behalf.  SIMPLE IRAs are “Saving Incentive Match Plans for Employees.”  Employers can have no other retirement plans and should have less than 100 employees. A 401(k) plan is a more complex retirement plan whereby employers maintain a plan with an administrator. They may elect to match employee contributions, contribute independently, or not contribute at all depending on the plan designations.

Step 2

File IRS Form 5300, Application for Determination for Employee Benefit Plan. You can find this form along with instructions on how to fill it out the IRS website at IRS.gov.

Step 3

Contact a plan administrator to open your small business retirement plan. Ask your bank, accountant or business attorney if they have firms they can recommend that function as plan administrators. If you have no recommendations, contact a brokerage firm with whom you may already be
doing personal investing, and ask for the small business planning department.

Step 4

Notify employees of the terms of employee eligibility. This should include an enrollment period with plan administrators available to answer any questions employees may have regarding the new plan.

Step 5

File Forms 8880 and 8881 with Form 5500 Annual Report of Employee Benefits. These forms can also be found on the IRS website.

Consult a tax adviser with any questions regarding establishing, maintaining and reporting an employee retirement plan. Innocent errors can cost you substantial amounts in fees, or lead to the termination of the plan.

Resources

Source: Kay Miranda, Demand Media

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