taxes? How can I get and keep quality employees? How can I save for retirement? The answer to these questions may involve the right retirement plan for your business.
What Are the Options?
Retirement plans have been around for decades but in recent years, the traditional pensions of the past are not as common. Today’s retirement plans are usually one of the IRA-Based plans, a defined contribution plan or the more traditional defined benefit plan.
IRA-Based plans include Payroll Deduction IRAs (PD IRAs), Simplified Employee Pension Plans (SEP) and Saving Incentive Match Plan for Employee IRA (SIMPLE IRA).
PD IRAs and SEPs are easy to set up and maintain and any employer with one or more employees can be eligible. For PD IRAs, the contributions are made by employees and are limited to the annual IRA limitation ($5000 for 2012). PD IRAs allow employees to make their IRA contributions through payroll deduction but do not provide the employer with any tax benefits.
SEPS are funded solely by the employer contributions. The limit is 25% of compensation, limited to $50,000 for 2012. It must be offered to all employees who are at 21 years old and employed for 3 of the last 5 years. An SEP plan for a self-employed business owner may be an ideal vehicle to defer income.
SIMPLE IRAs include employee contributions and require employer matching. Employees can contribute up to $11,500 (plus $2500 if 50 years old or older) per year. The employer must either match 100% of the first 3% of compensation or 2% of each eligible employee’s compensation. These plans are limited to employers with 100 or fewer employees. Although the SIMPLE plan can be expensive, it may be an excellent incentive for employees.
Defined Contribution Plans
Safe Harbor 401(k), Automatic Enrollment 401(k), Traditional 401(k) and Profit Sharing are considered defined contribution plans. All plans are open to any employer with one or more employees and the plans vary in their
complexity. Generally, the plans must be offered to all employees who are at least 21 years old and worked 1000 hours in the prior year.
For 2012, all 401(k) Plans allow employees to contribute up to $17000 per year and employees 50 years or older can contribute an additional $5500 per year. The total employer/employee combined contributions is the lesser of 100% of compensation or $50,000.
Safe harbor plans are designed to promote participation among all employees and do not require annual discrimination testing. This is an advantage for highly compensated employees, allowing them to contribute more than they would in a traditional plan. The downside to the employers is that all mandatory employer contributions are 100% vested.
Automatic enrollment plans enroll all employees unless they opt out of the plan. The contribution rates are set so the plans typically meet discrimination testing. These plans are suited for employers looking for high participation rates.
Traditional plans are subject to annual discrimination testing. Employee contributions are vested immediately but the employer matching contributions typically are vested according to the plan vesting schedule. The vesting encourages employee retention.
Profit sharing plans are funded by discretionary employer contributions. These plans allow employers to make large contributions for employees but the amounts are not pre-determined.
Defined Benefit Plans
Defined benefit plans are fixed pre-established benefits. Employers are usually required to make the contributions by the plan documents. These plans are available to any employer with one or more employee. These plans are not subject to the limitations of defined contribution plans and many employees value these plans because of a potential for greater benefits at retirement. These plans are more complex and more expensive to establish than other plans.
If you are interested in seeing how various retirement plans can assist you in reaching your business and personal financial goals, please contact Gary Bloome, PA.
Gary Bloome PA
9148 Glades Road
Boca Raton, FL 33434