Today, there are any number of options for setting aside and building a retirement nest egg for employees. Unfortunately, this multitude of options can lead to a significant amount of time spent researching and evaluating which is right for your business.
To help you cut through most of the extraneous information out there, we’ve narrowed it down to the top 3 options you should consider for your small business – 401(k) plans, SEP IRAs and SIMPLE IRAs.
Traditional 401(k) plans are the option that most are familiar with. This is probably because it allows business owners and employees to make consistent, tax-deferred contributions over the entire length of their careers. Not only do 401(k) plans offer higher contribution limits (in 2014, $17,500/yr up to age 50, $23,000/yr over age 50), they also offer more selections that are designed to match business cost and savings goals. Owners can choose whether or not they want to match, provide a vesting schedule or allow penalty free loan access. In addition, employees can contribute “catch-up” amounts over the age of 50 to make up for any previous shortfalls. Overall, the 401(k) is a favorite for a reason and should at least be considered by any company searching for a retirement plan option.
SEP (Simplified Employee Pensions) IRAs offer contribution limits similar to those of 401(k) plans (in 2014, up to 25% of your total income or 20% of adjusted income, up to a maximum of $260,000 in income – $52,000), but don’t offer all of the options and extras associated with the latter. One of the key distinctions of SEP plans is that employees do not contribute anything, rather employers fund 100% of the contributions, all of which are immediately vested for the employee and all employees must be eligible for and included in the plan. While there are no extra fringes such as “catch up” contributions or emergency fund loan availability, the tax rules and reporting associated with SEP IRAs are much simpler and easier to comply with than the more complex 401(k).
Simple (Savings Incentive Match Plan for Employees) IRAs are simple, no frills accounts that allow both employers and employees to contribute to retirement. The key difference here is that employers must match (according to a few different, specific arrangements) and the matched amount is immediately vested. Also important to note is that Simple IRAs have a much lower contribution limit ($12,000 in 2014, significantly less than 401(k)s). There are “catch-up” contributions allowances (in 2014, up to an additional $2,500), but as with regular contribution limits, they are also less than that allowed under 401(k) plans.
Choosing the right retirement plan for you and your employees ultimately comes down to who will participate and how they will participate, what contribution limits are appropriate and how much compliance reporting and maintenance will be required on the back end.
For more information on how to select and implement the right retirement plan for your business, contact Lescault and Walderman at 866-496-2042.