Most small business owners understand the benefits of offering a retirement plan. Not only does it help the business owner save for their own retirement, but it helps their employees save too. Offering a retirement plan also helps attract potential new hires that are looking for an opportunity with long-term benefits. A recent Glassdoor Survey found that four in five employees preferred benefits and perks over a pay raise and “a 401(k) ranks in the top five requested benefits”.1
In working with business owners, we’ve realized that having the right plan for the business is as important as contributing to the plan. It is not about having one plan in perpetuity but its about reviewing the plan to make sure it still addresses the specific needs of your business and its employees. As the business grows the needs of the business will evolve as well. How do you know which retirement plan is right based on the current needs of your business? Let’s take a look at the various midsize business retirement plans available for you to consider:
- Traditional 401(k) for Companies with 8+ Contributing Employees
401(k)’s are one of the more well-known types of retirement plan. In a 401(k), through a combination of salary deferrals, employer matching, and profit-sharing, one can contribute up to $56,000 in pre-tax dollars in 2019.2 That contribution amount could change annually based on updated IRS Guidelines. It should be noted that employers are not required to match or profit-share, it’s simply an option they can exercise.
In addition to the $56,000 contribution limit, there is also a $6,000 catch-up contribution allowed for employees over age 50 for a grand total of $62,000.2
The reason why this option is intended for companies with 8 or more employees that will be contributing to the plan is because of the administrative costs associated with 401(k) plans.
- Safe Harbor 401(k) for Highly Compensated Employees
These types of plans have similar characteristics to a 401(k) plan but make maximizing contributions easier because Safe Harbor 401(k)s are exempt from annual compliance testing which reduces the administration costs. As with traditional 401(k)s, employees can contribute a maximum of $56,000 annually. Salary deferrals and employer matching max out at $19,000, respectively. If a company should decide to offer profit-sharing contributions, that limit is set at $18,000.2 One important thing to note is that Safe Harbor plans require an employer to match at least 4% of employee contributions.3
There are several ways that an employer can fund these plans to qualify as a Safe Harbor plan.
- Solo 401(k) for Single Member Businesses
This plan is optimal for a business owner that has no employees. The only people who are eligible to contribute to this plan are the business owner and their spouse. If your plan on hiring employees in the future, this is a good option for you to explore because you can convert the Solo 401(k) plan to a Traditional 401(k) upon your first hire.3 As far as the contribution structure, the structure varies slightly in that the owner is the employee so there’s no matching component, however the contributions are consolidated and considered profit-sharing which allows for a maximum contribution of $56,000 annually, $62,000 if you’re over 50 and exercise the catch-up contribution. Please note, the profit-sharing maximums are dictated by what type of business you own, a Corporation or Sole Proprietor/Partnership, so it’s recommended to research this further before making profit-sharing contributions.4
- Simple IRA
Simple IRA’s are ideal for employers who have five to 15 employees. It allows employees and employers to make pre-tax contributions up to a maximum of $26,000 annually, combined. Employees can make contributions up to $13,000 annually, and employers can make a matching contribution of up to 13,000 annually. A few things to note about this option is employer matching is required, the options for how much the employer can match are limited, and the plan must be offered to all employees who earn more than $5,000 annually, regardless of their part-time/full-time status. The nice thing about this plan is that it is easy to set up, does not require annual compliance testing, and generally does not have administrative costs.3
- SEP IRA for Self-Employed
For self-employed individuals or small business owners, this is one of the most popular and easiest plans to set-up for businesses with no more than five to eight employees. The plan allows employers to contribute up to $56,000 or 25% of the individual’s annual compensation, whichever is less.5 Contributions cannot be made by the employee and the employer contributions are not mandatory. Contributions are made on a discretionary basis by the employer, however, if the employer makes a contribution they are required to make contributions for all employees which are directly proportional to what the employer contributes for themselves. For example, the employer could decide to contribute a percentage of eligible income but that allocation has to be consistent across all employees, meaning that everyone’s contribution is the same percentage of salary.6
- Cash Balance – a defined-benefit plan
A Cash Balance plan has some similar characteristics to a 401(k) plan. Like a 401(k) plan, a Cash Balance plan is a defined contribution retirement plan in which an employer makes regular contributions. However, the total funds a worker receives are based on the amount the employer contributes as well as other investment/actuarial parameters.7
Many older business owners seek out these types of plans as it gives them the ability to contribute a significant amount of money in a short period of time. People 65 years and older can put away over $200,000 annually in pretax contributions. These are unique plans that need some actuarial administration but have the ability to help someone catch-up on their retirement if they are making significant money. As there are many moving parts in this plan, one needs to have an actuary, an accountant, and an advisor that understands the complexities to implement and monitor this plan.7
In our experience working with business owners over the years we’ve learned that it’s in the best interest of the business owner to review the current retirement plan offering on an annual basis to ensure the business is offering the optimal plan based on the always-evolving needs of the business. Finding the right retirement plan requires a lot of time and analysis, in addition to many conversations not only with the business owners but also with their accountant as we all need to be on the same page. If you have questions about any of these plans or would like to discuss what plan might be right for your business needs, please call us at 914.825.8630.
Roman Ciosek – Managing Director – HighTower Westchester
914.825.8633 – firstname.lastname@example.org
1 Lee, Roger (2018, October 24). How 401(k)s Can Help Recruit and Retain Employees. Retrieved from https://www.workforce.com/2018/10/24/how-401ks-can-help-recruit-retain-employees/
2 Retirement Topics – 401(k) and Profit-Sharing Plan Contribution Limits. (2018, November 2). Retrieved from https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-401k-and-profit-sharing-plan-contribution-limits
3 Treece, D.D. (2018, November 20). 6 Best Small Business Retirement Plans 2018. Retrieved from https://fitsmallbusiness.com/small-business-retirement-plans/#SIMPLEIRA
4 One-Participant 401(k) Plans. (2018, November 6). Retrieved from https://www.irs.gov/retirement-plans/one-participant-401k-plans
5 How much can I contribute to my self-employed SEP plan if I participate in my employer’s SIMP IRA plan? (2018, November 5). Retrieved from https://www.irs.gov/retirement-plans/how-much-can-i-contribute-to-my-self-employed-sep-plan-if-i-participate-in-my-employers-simple-ira-plan
6 SEP Plan FAQs – Contributions. (2018, November 6). Retrieved from https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-seps-contributions
7 Wohlner, R. (2018, January 11). Cash Balance Pensions: Pros, Cons for Small Biz. Retrieved from https://www.investopedia.com/articles/financial-advisors/092315/cash-balance-pensions-pros-cons-small-biz.asp
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