Employer Retirement Plans Small Business

Employer Retirement Plans Small Business – Help Small Businesses Choose the Right Employee Retirement Plans CPAs can help business owners sort through the various options available. Jimmy J. Williams, CPA/PFS

Retirement plans offer significant tax benefits to small business owners and give them and their employees an incentive to save for the future. There are several types of retirement plans available to small businesses, each with their own requirements and limitations. One plan isn’t necessarily perfect for companies of all sizes and ownership, so small business owners should do their homework before making a decision.

Employer Retirement Plans Small Business

As a CPA, you can help business owners choose and implement the plan that works best for them. You can base your recommendations on the unique characteristics of your client’s business, such as the owner’s retirement goals, how the business is organized (such as a sole proprietorship, limited liability company, C corporation or S corporation), number of employees, etc. . You can also help them understand the legal and compliance issues associated with each type of plan, as well as any tax benefits it may provide.

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What follows is an overview of the types of plans, as well as a discussion of the issues to consider when helping small business clients through the often confusing process of choosing a retirement plan.

There are different types of retirement plans available to small business owners. The main ones include the following (see the Small Business Retirement Plan Comparison Chart for more details on the four most common plan types):

SEPs can be used by businesses with any number of employees. Contributions are made only by the employer (up to 25% of each qualified employee’s compensation or $55,000 for 2018, whichever is less) and are not taxed as business expenses. The main advantage of SEPs is their ease of administration. Once accepted, there is usually no requirement to file annual IRS forms for SEPs, and administrative costs are minimal.

There are three steps in creating a SEP. The employer must (1) enter into a written agreement to provide benefits to all eligible employees; (2) provide employees with certain information about the agreement; and (3) create an IRA account for each employee. The IRS has a sample SEP document, Form 5305-SEP, Employee Simplified Pension Contribution Agreement—Individual Retirement Account. However, not all employers can use Form 5305-SEP, and some must use a prototype document instead.

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However, SEPs do not allow employees to save income, and employees always receive 100% employer contributions to their SEPs. Therefore, they may not be the best choice for companies in industries with high employee turnover or for those looking to use a pension plan to retain employees. Another potential disadvantage of these plans is that they require the employer to contribute the same percentage as all eligible employees. Because of this requirement, a small company with a self-employed owner may not have enough money to support such a plan if the owner wants to make a large contribution to his SEP.

SIMPLE IRAs are generally available to businesses with 100 or fewer employees that received compensation of $5,000 or more in the previous year. These plans are funded by tax-free employer contributions and pre-tax employee contributions.

As the name suggests, SIMPLE IRAs are easy to set up and administer. To implement this plan, the employer can use Form 5304-SIMPLE, Small Employer Savings Incentive Plan (SIMPLE) – Not for Use with a Specified Financial Institution, or Form 5305-SIMPLE, Small Employer Savings Incentive Plan. (COMMON) – For use with a designated financial institution. As with Form 5305-SEP, the employer must keep the form in its records but not file it with the IRS.

A small employer may want to implement a SIMPLE IRA plan because it allows employees to defer income by making salary reduction contributions (subject to annual limits) to their SIMPLE IRA. Another potential advantage of an employer SIMPLE IRA over a SEP is that it typically requires a smaller employer contribution. The employer must match each employee’s salary reduction contribution in US dollars up to 3% of the employee’s compensation or make a nonselective contribution of 2% of the eligible employee’s compensation (up to $275,000 for 2018), regardless of whether the employee contributes to a reduction in wages.

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However, as with SEPs, employees always receive 100% employer contributions to SIMPLE IRAs, so they may not be the best choice for companies in high-turnover industries.

Qualified plans are more complex than a SEP or SIMPLE IRA and therefore have stricter reporting requirements. But they may be more suitable for a larger or growing business. Larger entities generally have the staff and infrastructure to undertake the required reporting under a qualified plan, and features such as provisions for loans and on-the-job withdrawals permitted in the applicable plans that are not permitted under a SEP or SIMPLE are generally desirable. IRA. There are several types of defined term plans, which can be divided into two broad categories: defined benefit plans and defined contribution plans.

Defined benefit plans. Commonly called pension plans, defined benefit plans promise to pay workers a steady stream of income at some point in the future. The amount each employee receives usually depends on their earnings history and length of service. Employers must contribute enough funds to the defined benefit plan each year to meet the so-called minimum funding requirement. Because of the complexity of calculating minimum funding and other requirements, administering a defined benefit plan usually requires the professional assistance of an actuary. For this reason, very few small businesses use them.

Defined contribution plans. In defined contribution plans, employers make contributions into individual accounts for each employee. Employees are generally allowed to invest the money as they see fit among the investment options provided by the plan. Defined contribution plans do not require the employer to immediately remit amounts contributed to the plan and may allow employee loans.

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Types of defined contribution plans include profit sharing plans and money purchase plans. Under a profit-sharing plan, employer contributions are discretionary, so the employer is not required to make contributions to the plan each year. Under a money purchase plan, contributions are mandatory, so the employer must make contributions to the plan each year, and the contribution rate used to determine the amount of contributions for each year cannot be changed.

Profit-sharing plans may include a 401(k) feature (also known as cash or deferred payment or CODA) in which employees participating in the plan can elect to have a portion of their pre-tax compensation paid sooner in individual account from the received monetary compensation. These contributions are called “elective deferrals” because the employee chooses to delay receiving the amount deposited into the account. A profit-sharing plan with a 401(k) feature is commonly referred to as a “401(k) plan.” An “Individual 401(k) Plan” is a 401(k) plan that applies only to the business owner and his/her spouse.

In 2018, 401(k) members can make a selective deferral of up to $18,500 ($24,500 for members who turn 50 at the end of the calendar year). If the plan allows, employers may contribute a percentage of each employee’s compensation to the employee’s account (a non-elective contribution) or may, within certain limits, match the employee’s elective deferral amount, or both. Total employer and employee contributions to a 401(k) plan are limited to the lesser of:

A 401(k) plan can be designed so that employee ownership of employer-paid or non-elective contributions vests over time in accordance with a vesting schedule. After the end of the contribution period, the employee receives 100% of the employer’s contributions and is irrevocably entitled to the full amount of the contributions on his account. Providing employer contributions to a retirement plan can help an employer retain valuable employees.

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Under a phased vesting schedule, the employee receives contributions from the employer gradually over several years. Many plans use a five-year vesting schedule where the employee receives 20% of the employer’s contributions per year of service, with the employee receiving 100% of the contributions at the beginning of the 6th year. For example, an employer plan includes a five-year employer contribution schedule and optional contributions to employee accounts as a plan provision. The employer makes an employer matching contribution to the employee’s retirement account of $10,000 in the first year. If an employee decides to leave the company during his or her second year of service, he or she will be entitled to retain $2,000 or 20% of the employer’s contributions.

Alternatively, some plans require “rock weighing”. Under Cliff Vesting, the employee is entitled to all employer contributions after the employee reaches a certain minimum number of years of service. This vesting method reduces the amount of employer contributions withheld from higher turnover workers.

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