If you are looking for the right retirement plan for your small business – congratulations! You have several options. The four most popular types of small business retirement plans are:
Not so long ago, the first three options were simpler and cheaper alternatives to the traditional 401(k). Each of the three defined benefit plans was easier to set up, and offered tax-deferred growth and pre-tax contributions.
The Solo 401(k), SEP IRA, and SIMPLE IRA are still popular. But a new breed of cloud-based 401(k) providers has put the 401(k) within reach of many more small businesses.
Even if your small business has as few as 25 employees, a 401(k) may be the best retirement plan option for your dynamic, growing enterprise.
The four plan options are all designed for tax-deferred growth of retirement savings.
Each plan is a bit different. And some of the differences could make one or more plan types a deal breaker for your small business. Let’s take a look at each. (For a review of even more types of plans, visit the IRS website.)
This retirement plan is for self-employed individuals. With no company to sponsor one for them, the Solo 401(k) is a retirement plan for the business owner or partnership going solo.
The business owner can make a contribution as an employee and as a business owner. And total contribution limits are much higher than with a traditional IRA. As with the traditional 401(k), the combined employee and employer contribution limit is $55,000. A $6,000 catch-up contribution is also allowed. An employed spouse is subject to the same limits.
Much like with a 401(k), Solo 401(k) contributions are flexible. Both the employee and the company can make contributions one year and skip the next.
Opening up a Solo 401(k) is akin to opening up a new brokerage account. But once assets reach $250,000 the IRS requires an annual report on the plan. That means completing Form 5500-EZ.
Solo 401(k) key takeaway: this is a plan for the sole proprietor or the owner and spouse.
The term is short for Simplified Employee Pension Individual Retirement Account. No wonder most people just call them SEP IRAs.
This is unlike a traditional 401(k) in that the employee sets up an IRA to receive contributions. The company then makes contributions to the individual account. Also unlike a 401(k), employees are not allowed to make deferrals. Only employers can contribute to an SEP IRA. But contributions are not mandatory, and if made, are not required every year.
If a company does make contributions, it must contribute the same percentage of compensation to each employee. And even though employees can’t contribute, the contribution limit of $55,000 holds here as well. And with no employee contribution, there is no catch-up provision.
No tax filings are required for a SEP IRA.
SEP IRA key takeaway: Does not allow employees to make contributions. Company alone funds the retirement plan.
A SIMPLE IRA is a Savings Incentive Match Plan for Employees Individual Retirement Account. For this blog post, let’s keep it SIMPLE.
A SIMPLE IRA is designed for small businesses with 100 or fewer employees. Employee contribution limits are below those of the traditional 401(k). And the catch-up provision is half the $6,000 allowed under a 401(k). A key feature of the SIMPLE IRA is that employer contributions are required. The company has two options. It must make matching contributions of up to 3%, or contribute 2% of each eligible employee’s compensation. (Companies can reduce the 3% match over certain defined periods.)
Setting up a SIMPLE IRA is like setting up a SEP IRA. Employees control their own investments. It is even possible for employees to choose their own financial institution. Loans are not allowed with these plans. No tax filings are required.
Key SIMPLE IRA takeaway: employers must make contributions.
The 401(k) is big brother to the other three plans. The 401(k) offers a flexible plan design, and the company and employees control their contributions. An investment fiduciary chooses the investments that will be available to participants. The fiduciary also monitors the investments to ensure they remain appropriate.
But 401(k)’s are heavily regulated. And they come with administrative and compliance burdens. For example, there is the annual filing of IRS Form 5500. To ensure benefits are broadly shared, plans must either perform non-discrimination tests or adopt a Safe Harbor plan.
The good news is that small businesses can offer a modern 401(k) and hand off most administrative and compliance burden.
401(k) Key takeaway: Employees and employer have considerable flexibility with plan contributions and plan design.
Rules about contributions may determine which plan you choose for your small business. The general rules on contributions for each of the plans are presented below.
The traditional 401(k) is the most flexible of retirement plans discussed here and offers generous contribution limits. One key advantage is the employer’s flexibility. They may choose to regularly provide a specific match. Or they may decide to contribute a different amount each year. Today’s 401(k)s can offer automatic enrollment and automatic escalation. These features can get employees enrolled and saving more each year. The 401(k) allows for higher employee deferrals than the SIMPLE IRA, and the SEP IRA (where they are not even permitted).
The downside to the traditional 401(k) used to be complexity, cost, and sometimes the headaches associated with compliance.
That’s no longer the case. At ForUsAll, we believe plan sponsors should not have to devote tremendous company resources to provide a retirement plan. We can manage everything from the day-to-day operations of your 401(k) to signing the Form 5500. ForUsAll offers proprietary technology and deep compliance experience. That means we can virtually eliminate the work and administrative risk that comes with offering a 401(k). That means you can spend time on your business plan and less on your retirement plan. You can see more about the services ForUsAll can provide here.
On the investment side, ForUsAll can act as your independent advisor and 3(38) fiduciary. That means you can outsource mutual fund selection and fund reviews. We select a fund menu that allows participants to create portfolios to meet their savings and retirement goals. And all at a low cost.
If you are looking for the right retirement plan and like the idea of outsourcing tasks and liability, and want to work with a provider who puts fiduciary responsibilities in writing, give us a call today. Let us estimate your retirement plan expenses on up to three recordkeepers at no cost.
Give your employees more than just a 401(k), join the movement.