As a business owner, you know that offering a retirement plan is a key factor in attracting and retaining quality people. In fact, in today’s business environment, it’s a must if you want to stay competitive.
It’s also a must if you have just a few, or even no employees besides yourself and perhaps a spouse. That’s because small business owners need retirement savings as well, and a company retirement plan is one of the best ways to accomplish this. Retirement plans also can have significant tax advantages, so even if your retirement savings are handled elsewhere, a company retirement plan still makes sense.
But what type of retirement plan should your company offer? The answer depends on several factors, like how many employees you have, is your revenue fairly consistent, and what kind of tax deferment makes the most sense to you?
Here are five different types of employer sponsored retirement plans and the details of each.
1) DEFINED BENEFIT PENSION PLAN
We’re including the traditional “pension plan” in our list more to illustrate how times have changed. There was a time when “pension plans” were the norm in business. The company contributed to the retirement plan (and not the employee), and the payout was “defined” (i.e., “when you retire after xx years, you get xyz a month”). The big problem with these is the investments did not always go as planned, and people started living longer as well. So companies promised a certain payout, and got into financial trouble meeting those obligations (remember the automaker bailouts a few years back? A lot of that was pension obligation.)
The above is why retirement plans have shifted to employee contribution over employer-driven (and even when they are employer driven, they are defined contribution, and not payout, meaning a certain dollar amount at payout is not promised.)
2) TRADITIONAL 401(K)
401(k) plans have become the most common type of retirement account, and with good reason – they are flexible for both employer and employee; they allow solid contribution levels for both; and they are also fairly easy to administer. They are also the “norm” in the business world, so offering a 401(k) keeps a business competitive.
We mentioned flexibility – employees love these because they can borrow against them, they control what gets invested in, and they can also roll over the balance into an IRA or similar upon leaving the company. Employers like them because the contribution level is not defined (although an employer should contribute if they can, the flexibility to not have to contribute can be attractive for down years), and there are solid tax advantages for both employee and business as well. The contribution limit is $18,500 for employees (2018 number), with an employer contribution limit of 25% of compensation, up to $55,000. (This is the total contribution limit including the employees $18,500, with an extra 6k added for a catch-up provision for employees over 50.)
This is our favorite retirement plan for businesses, and it can work for almost any size business. We should also mention 403(b) plans, which are essentially the same thing, but for non-profits, and 457 plans, which are essentially 401(k) plans for state and local government employees
3) SOLO 401(K)
Like the name implies, this is a 401 (k) for a solo entrepreneur (plus a spouse who contributes to the business, so perhaps it should be solo +1!) They are simple to setup and administer, and allow a business owner to make pre-tax contributions both as an employee and an employer, making these excellent for tax deferral. As of 2018, total contributions are limited to $55,000 ($61,000 for those 50 and older), but this goes for both business owner and spouse
4) SEP IRA
This stands for “Simplified Employee Pension Individual Retirement Arrangement”. This is an “employer-only” contribution. Unlike a profit sharing plan, the amount an employer contributes must be the same percentage to all employees, but the amount is not a mandatory number (and since employees do not contribute, the employer is the only one who benefits tax-wise.) Employees are always 100% vested from day one in a SEP IRA, and can withdraw the money anytime, with a penalty for doing so before 59 ½.
5) SIMPLE IRA
This is an acronym for “Savings Incentive Match Plan for Employees Individual Retirement Account”. These plans are only for businesses with less than 100 employees. Also be aware that any employee who earns at least $5,000 can participate, which may or may not be attractive to business owners. There are mandatory employer contribution levels – a company must make a 2% contribution to all of the employees, or conversely, offer a 100% match (up to 3%) on each employee contribution (there can be some flexibility here depending on business circumstances where the contribution can be 1% two years out of a five year period.)
WHICH RETIREMENT PLAN IS BEST?
This depends on the structure of your company and what you would like to accomplish. Every retirement plan should be uniquely designed to fit the company. Some financial advisors will steer you in the direction that fits them. But this is about YOU. Find a professional that specializes in retirement plans that will set you up with a plan that best benefits your company.
If you are interested in speaking about 401(k) plans, or any other retirement plan, give us a call at (801) 274-1768 or send us an email info@truenorthwealth.com, or visit our website to learn more about our Business Retirement Planning services.
