Does your business offer a retirement plan for employees? If not, it may be time to consider setting one up. A retirement plan may be beneficial for several reasons. It can help you to recruit employees as part of your overall compensation package, and can help your employees by giving them a tax-advantaged way to save for their retirement. A plan can also provide tax credits or deductions for your business, and help you provide for your own retirement.
Many business owners believe it would be too costly to provide a retirement plan. But there are a variety of plans that are designed specifically for small businesses, to keep costs low and administration relatively simple.
Perhaps the easiest plan to set up is a Simplified Employee Pension (SEP). With a SEP, contributions are made by the employer, and go into individual retirement accounts set up for each employee. This means that the employees do not have the contributions withheld from their pay, the contributions are all from employer funds.
Employees manage the investments in their own accounts, just like a traditional IRA. The contributions are a percentage of employee earnings, generally up to 25 percent of compensation with a maximum of $52,000 for 2014.
You do not have to contribute every year, which makes this a good option if cash flow may be an issue. In years that you do contribute, each eligible employee must receive the same percentage.
You have until the due date of the business tax return (including extensions) to set up a plan for the previous tax year. A SEP-IRA does not require the employer to submit annual tax filings with the IRS.
SIMPLE plans allow your employees to defer part of their salary into their own retirement accounts. You, as employer, can either match employee’s elective deferrals on a dollar-for-dollar basis up to 3% of the employee’s compensation, or you can make a 2% contribution to each eligible employee’s account regardless of whether or how much the employee deferred.
Generally, you can set up a SIMPLE plan if you have 100 or fewer employees. The plans come in two varieties – SIMPLE IRAs and SIMPLE 401(k)s.
SIMPLE plans must be set up before October 1st of the tax year for which you are contributing, provided you did not previously maintain a SIMPLE IRA plan. There is an exception if you are a new employer that comes into existence after October 1 of the year.
A SIMPLE plan does not require annual tax filings with the IRS, but you will need to give each participating employee an annual statement indicating the amount contributed to his or her account for the year.
A 401(k) plan is similar to a SIMPLE plan in that it allows employees to elect to defer part of their salary into their 401(k) account. But a 401(k) plan offers larger deferrals, with a limit of $17,500 for 2014, versus $12,000 for a SIMPLE plan. The discrepancy in contribution limits is more pronounced if the employee is age 50 or over and the higher “catch-up” contributions kick in. In this case, the 401(k) deferral limit would be $22,000 for 2014, versus $14,500 for a SIMPLE plan.
Employers may make matching contributions up to 25% of employee compensation, with a maximum of $52,000 for 2014. This $52,000 maximum applies to the total of employer plus employee contributions for the year.
401(k) plans do need more administration, requiring Form 5500 to be filed annually, and special IRS testing to ensure the plan does not favor highly compensated employees.
For all of these plans, the amount of employer contributions is a tax deduction for the business, making them a useful tool for tax planning purposes. These are just a few of the options that may be available for your business. Your tax advisor can guide you in choosing the best plan for your unique situation.