Retirement Plan Options for Small Business Owners

retirement-plans for small busiensses

Many small business owners think that they can’t afford to offer a retirement plan to their employees. They believe that the costs and regulatory burdens of sponsoring a retirement plan preclude them from being able to provide this valuable employee benefit.

However, this often isn’t the case. “There is a wide range of low-cost, easy-to-administer qualified retirement plans that are specially designed to enable small employers to offer a plan to their employees,” explains Martin Walcoe, EVP of David Lerner Associates. “These plans typically don’t have the start-up and operational costs of conventional retirement plans”

Three of the most popular plans are:

1. Simplified Employee Pension plan — Also known as a SEP-IRA, this type of plan is often ideal for small businesses and self-employed individuals. Sole proprietorships, S and C corporations, partnerships and LLCs all may qualify to establish a SEP-IRA.

You and your employees open your own IRAs and your business makes tax-deductible contributions into them (employees cannot contribute to their SEP-IRAs). These contributions grow on a tax-deferred basis and all money contributed to employees’ accounts is 100 percent vested immediately.

SEP-IRAs feature generous contribution limits: up to 25 percent of compensation or $52,000 in 2014, whichever is less. The same percentage of compensation must be contributed to each eligible employee’s account, including yours. However, this percentage can be changed each year based on how profitable your business is and how much you can afford to contribute.

2. SIMPLE IRA — Almost any small business with 100 or fewer employees (including self-employed individuals) can establish and operate a SIMPLE IRA by adopting Form 5304-SIMPLE or 5305-SIMPLE. There are no nondiscrimination testing or participation requirements for SIMPLE IRAs. Unlike SEP-IRAs, employees can also make tax-deductible contributions to their SIMPLE IRAs if they want, which may enable them to save more money for retirement over the long term.

In 2014, employees may contribute up to $12,000 to their SIMPLE IRA, or $14,500 if they are age 50 or over. Employer contributions are tax-deductible, while employees make contributions on a salary-deferral basis. All contributions to SIMPLE IRAs are 100 percent vested immediately, which means employees can take their money with them if they leave their employer for any reason.

3. SIMPLE 401(k) — This plan was introduced in order to make it easier for small employers to offer the popular 401(k) plan to their employees. In 2014, employees and employers (via optional matching contributions) can contribute up to $17,500 to a 401(k) account, or $23,000 if the employee is age 50 or over.

The SIMPLE 401(k) incorporates some of the best features of SIMPLE IRAs and traditional 401(k)s. It is very similar to the SIMPLE IRA with a few exceptions:
•    All employees who are at least 21 years of age and have completed at least one year of service with the company must be eligible to participate. There is no age requirement for participation in SIMPLE IRAs.

  •   Employers must file Form 5500 with the IRS each year.
  •  Employers cannot offer their employees any other retirement plan in addition to the SIMPLE 401(k) plan.
  •   Optional participant loans and hardship withdrawals may be allowed with SIMPLE 401(k) plans, though they are not required.

If you have been hesitating to offer a retirement plan to your employees due to a fear of high costs and cumbersome regulations, don’t let this hold you back any longer. One of these options might enable you to offer just such a plan at a cost that fits within your company’s budget.

To learn more about SIMPLE IRAs and SIMPLE 401(k) plans and other retirement savings options, please contact David Lerner Associates at (800) 367-3000.

Material contained in this article is provided for information purposes only and is not intended to be used in connection with the evaluation of any investments offered by David Lerner Associates, Inc. This material does not constitute an offer or recommendation to buy or sell securities and should not be considered in connection with the purchase or sale of securities. Member FINRA & SIPC

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