Offering a retirement plan is a great way for a small business to attract and retain employees. It helps everyone, including the owner, shelter income from taxes while saving up for retirement.
Because different businesses have different needs, the tax code offers several types of small business retirement plans.
Among the options are:
- Simplified Employee Pension Plan (SEP): Under this plan, the employer establishes an IRA for each employee and contributes up to 25 percent of an employee’s compensation each year. There is no employee contribution. It’s simple, and it's popular with small family-owned businesses.
- Savings Incentive Match Plan for Employees (SIMPLE): Companies with fewer than 100 employees can set up SIMPLE plans. Companies with fewer than 100 employees can set up SIMPLE IRAs. Each employee opens an IRA account, and both employer and employee can contribute money to it. There is minimal paperwork and no separate administration fees. It’s an efficient way to provide a retirement plan to a large group of people – that is, large by small-business standards.
- Traditional 401(k): These plans allow employees to set aside a portion of their salary for retirement on a pre-tax basis. (If a company offers a Roth 401(k) plan, then contributions may be made on an after-tax basis.) Companies offering them need to file paperwork each year to ensure a company’s plan complies with IRS regulations. But still, a traditional 401(k) Plan is a good option for businesses that plan to grow and want flexibility in how much money the employer contributes.
- Safe Harbor 401(k) Plan: A traditional 401(k) involves a lot of paperwork to ensure that it complies with IRS regulations. Under a Safe Harbor plan, the paperwork is minimized because it includes either a matching or an automatic employer contribution. Although it is less flexible than a traditional 401(k), it may be easier for a small business to operate and allows the owners to contribute regardless of how much their employees contribute.
- Individual 401(k) Plan: A 401(k) plan for companies that only have owner(s) and their spouses with no common law employees. An individual 401(k) plan may allow the owner(s) to set aside more income than other types of retirement plans.
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