Employees of small businesses often end up left out of employer-sponsored retirement plans simply because small businesses do not have the funds available to provide this type of benefit for their employees or small business owners do not know the different retirement plan options available to them. However, small businesses owners can create simple retirement plans to assist employees in their retirement planning. Below is an outline of two different simple approaches for retirement plan comparison.
SEP-IRA
Any business that does not currently provide a retirement plan for their employees is eligible to set up SEP-IRA plans for their employees. SEP-IRAs are simple and easy to create and maintain; however contributions are the responsibility of the employer. To set up this type of retirement plan, the employer needs to complete IRS government form 5305-SEP and employer tax filings are not required for the SEP-IRA plan.
Contribution limits are 15% of employee income up to $24,000 and the plan must be offered to all employees over the age of 21 who have worked for the employer for at least three of the past five years and whose income is a minimum of $400 annually. Contributions are vested 100% immediately and employers determine whether or not to contribute annually and the amounts to be contributed. Withdrawals may be made immediately by the employee, but are subject to current federal tax laws and possible penalty if withdrawal is made before age 59 ½.
Simple IRA
Simple IRAs require little paperwork on the behalf of the employer. Businesses with 100 or less employees who do not have another retirement plan currently in place are eligible to create this kind of retirement plan on behalf of their employees. While the bank or financial institution managing the retirement plan does the majority of the paperwork, employers need to complete IRS form F5304-SIMPLE or F5305-SIMPLE and no employer tax filing is required.
Contributions are made by the employee and the employer and are limited to $6,000 annually by the employee. Employers may match employee contributions dollar for dollar, up to 3% of employee income per year or make a straight contribution of 2% of employee income up to a maximum of $3,200 per year. Simple IRA retirement plans must be offered to all employees who have earned at least $5,000 in the previous two years. Contributions are vested 100% immediately and may be withdrawn at any time, but are subject to penalties if withdrawn before age 59 ½.
Other retirement plans that an employer might consider are 401(k) plans, profit sharing, defined benefit plans and money purchase plans. In making a retirement plan comparison, business owners should take into consideration the size of their company, their desire to make matching contributions to the retirement plan, employee length of service and employee desire to have a work-sponsored retirement plan. Employers should consult with a benefits administrator or financial advisor to review retirement plan comparisons, and select a plan that will best serve both them and their employees. (Photo:gshowman)
