I can understand and appreciate the overwhelming list of tasks that a business owner sometimes has to accomplish. Perhaps on that list there may be the task of setting up a retirement plan for employees. The day-to-day essential tasks understandably take precedent over the overwhelming concept of establishing a retirement plan, but business owners should not procrastinate for too long as more and more workers are in need of a retirement savings vehicle. Additionally, although setting up a plan does involve some work on the part of business owners, it does not necessarily need to be a time consuming or expensive proposition. Below are three retirement options employers could consider implementing, depending on what they are hoping to accomplish.
1. Payroll Deduction IRA
A payroll deduction IRA requires no financial commitment and very little time from the business owner. Once established, this simple plan requires very little resources on the part of the payroll department. A payroll deduction IRA simply allows employees to open an IRA or Roth IRA with a vendor in which the company has established a payroll agreement. Once established, employees can have contributions withheld from their paychecks and directly deposited to their IRA or Roth IRA. The limit on contributions to a Traditional or Roth IRA is $6,000 per year; however, employees over the age of 50 can contribute an extra “catch up” contribution of $1,000 per year. This type of plan can be a great option for small businesses looking to offer a benefit for employees without the business having to make a financial commitment.
2. Simple IRA
The Simple IRA is very similar to a payroll deduction IRA, however, it requires a financial commitment from the business. This plan is for the business that wants to provide an important benefit with a modest financial commitment. Business owners can look to this tool to help attract and retain talent. Employers are required to do one of the following:
2% nonelective contribution - 2% of each eligible employee’s compensation regardless of whether or how much the employee deferred, or
3% matching contribution -match of employee’s elective deferrals on a dollar-for-dollar basis up to 3% of the employee's compensation. The 3% limit may be reduced to a lower percentage, but in any event, not lower than 1%. The 3% limit may not be lowered for more than 2 calendar years out of the 5-year period ending with the calendar year the reduction is effective.
Employees that are offered a SIMPLE IRA plan are often appreciative of the financial contributions from the business and may find the higher contributions limits attractive. Contribution limits are higher for Simple IRA’s with employees able to contribute $13,500 annually, plus an additional $3,000 for those over the age of 50.
The 401(k) is synonymous with retirement planning and is one of the most effective retirement plan options. This plan is used by one person businesses all the way up to multinational organizations. Contribution limits are significantly higher with employees able to contribute $19,500 annually, plus an additional $6,500 for those over age 50. Although this is not required of employers, they may offer a match or a fixed contribution.
The downside of a 401(k) plan is that it adds a cost and time burden to the business. Even if an employer were to not implement a match or profit-sharing contribution, the business owner would still incur costs.
401(k)s have annual filing and record-keeping requirements that can vary greatly in cost. A 401(k) is a great option for businesses with 20 or more employees or smaller businesses where many of the participants are expected to participate.
In addition to the above listed plans, there are many different strategies business owners can implement in order to greatly benefit their own financial plan. Adding components such as a Cash Balance Plan or a Safe Harbor allow the employer a great deal of flexibility and potential for deductions. As a business owner, you have options for the type of retirement plan you wish to offer and those options should be carefully evaluated. The Financial Advisors at FSG are well versed in retirement plans and are ready to talk to you about your options today!
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