Small Business Retirement Plan Options

retirement planning

 Matthew Baisden By: Matthew Baisden

One of the more difficult challenges for a business with less than 5 employees is finding a cost-effective, manageable retirement plan option. Time spent focusing on a retirement plan is time spent not growing your business. But like healthcare and vacation programs, a retirement plan can help your business recruit and retain top employees.

For this segment of businesses there are no perfect solutions and every option should be analyzed carefully for how it fits with both your personal and business goals. This piece is meant to help you understand the basics of each option, there are additional details that should be discussed before deciding on which option is right for your business. Please let us know if you are reviewing your retirement plan choice and we can help in the process.

 

Solo/Individual 401(k) Plan

SEP IRA

SIMPLE IRA

Traditional 401(k) Plan

Ideal Business

Everyone in the business is either an owner or spouse. Multiple partners may need to agree on company contribution amount.

Business with employees who are low earners. If the business has employees with significant salaries, this plan may not make sense.

Small business with employees; Owners do not have cash flow to save significant amounts ($50,000+)

Business with several employees; Owners with the cash flow to save a significant amount ($50,000+)

Key Advantages

Not aggregated with IRA’s for IRA aggregation rules; Employee contributions add flexibility; Roth savings are allowed.

Easiest plan to manage; simple calculations

Cheaper and less administrative tasks than a Traditional 401(k)

Flexibility of employer contributions; vesting schedules can be attached to employer dollars; Roth can be used; Highest savings limit for owners; Recruiting and retention tool.

Biggest Disadvantages

If an employee is hired, this plan becomes significantly more costly if not adjusted.

Aggregated with other IRA’s for aggregation rules; No Roth option; Amount to employees may be significant depending on salaries

Low savings limits for Highly Compensated Employees & Owners; No Roth option

Most costly; Additional administrative tasks; ERISA Compliance testing annually

Eligibility for Employees

Business owners & spouses only.

Must be included if: Age 21+; Worked for business in at least 3 of last 5 years; Received at least $600 in compensation

Must be included if: Received $5,000+ in compensation during any 2 preceding calendar years and expected to make $5,000+

Must be included if: Age 21+; Worked at least 1 year and completed 1,000 hours in that year

Employer Required Contribution

N/A

N/A

2% Non-Elective* or 3% Match

None; Typically, a “Safe Harbor” Contribution used to pass some DOL compliance tests

Employee Savings Max (2019)

$19,000

Not Allowed

$13,000

$19,000

Catch-Up Contribution (2019) (Employees > 50 Years Old)

$6,000

N/A

$3,000

$6,000

Profit Sharing or Employer Discretionary Contributions

Yes: Maximum 25% of Compensation; See IRS discussion for self-employed calculations

Yes: Maximum 25% of Compensation; See IRS discussion for self-employed calculations;

Must use same contribution rate for every participant

Not Allowed

Yes; Subject to DOL discrimination testing

Maximum Annual Contribution (2019)

$56,000 ($62,000 if eligible for catch-up)

$56,000

Sum of employee & employer contributions

$56,000 ($62,000 if eligible for catch-up)

Vesting

Typically, 100% Immediately on all dollars

100% Immediately on all dollars

100% Immediately on all dollars

100% on Safe Harbor and Employee contributions; Non-Safe Harbor and Profit Sharing can be subject to up to 6 Year schedule

IRA Tax Filings

Form 5500-EZ when plan balance is > $250,000

Not Applicable

Not Applicable

Form 5500 must be filed annually

Cost to operate

Very low cost

Very low cost

Low – Account fees typically charged to account holder

Typically, between $8k-$10k/year depending on service providers

 

*2% Non-Elective subject to $280k income limit;

 

This material has been prepared for informational purposes only and should not be used as investment, tax, legal or accounting advice.  All investing involves risk. Past performance is no guarantee of future results.  Diversification does not ensure a profit or guarantee against a loss.  You should consult your own tax, legal and accounting advisors.

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With four years’ of portfolio management experience under his belt, Matt came to Plancorp in 2016 to join our Retirement Plan Advisors practice. He loves helping business owners build retirement plans that make their companies stronger and give owners the ability to retire when they want. More »