Most small business owners are fully aware of the cost of employee turnover and are diligent in offering benefits that appeal to and reward their employees.
One of the most common benefits offered is the ability for employees to participate in a qualified retirement savings plan with some sort of employer contribution. Not only are qualified plans a great perk to offer employees, but often they can provide the business with a significant tax deduction and the owners with the opportunity to stash away some cash for retirement.
There are several qualified retirement account options and deciding on the best plan to meet the goals of the company and the owners can be challenging. The following are just a few of the plans that could be considered:
A SEP-IRA allows for up to 25 percent of employee compensation (or net self-employment earnings) to be contributed to the plan, with a maximum of $54,000 (2017) per participant. However, a SEP-IRA only allows for employer contributions — employees cannot save through payroll deductions. Contributions are discretionary and can vary from year to year. A SEP-IRA plan is easy to set up and maintain and generally does not require annual filings. Because this plan does not allow for employee deferrals, it may not be ideal for a small business but better suited for a profitable self-employed individual who is looking to maximize tax savings.
A SIMPLE-IRA allows for both employee payroll deductions and employer contributions. Employees can contribute up to a maximum of $12,500 (or $15,500 for those age 50+). Employers are required to contribute annually and must make either a dollar-for-dollar matching contribution up to 3 percent of an employee’s compensation or a non-matching contribution of 2 percent for each eligible employee. This can be an ideal plan for employers with fewer than 100 eligible employees that want a low cost plan and want to encourage their employees to save for retirement.
401(k) plans are administratively a bit more complex. They require annual IRS reporting (Form 5500). Traditional 401(k)s also require annual discrimination testing to ensure that deferrals and matching contributions do not favor highly compensated employees or owners. The safe-harbor 401(k) does not require discrimination testing, as long as the required contributions are met. Both types of 401(k)s allow a maximum employee contribution of $18,000 (or $24,000 for those age 50+). Employer contributions to a traditional 401(k) are entirely discretionary. Employer contributions to a safe-harbor 401(k) are required and can be a matching contribution or a non-matching contribution. These 401(k) plans can be advantageous to businesses with over 100 eligible employees that are ineligible for a SIMPLE-IRA plan. A safe-harbor 401(k) plan also can benefit owners and other highly compensated employees because the lack of discrimination testing will allow higher contributions.
Depending on the goals of the business owner, there are several options even beyond those outlined above to choose from when deciding on the best retirement plan to establish. It is important to consult with a CPA and a financial advisor to analyze the potential tax savings and outline the pros and cons of each type of plan to ensure the best fit for the company.