Employee Benefits: More on Retirement Plans

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Determine which plan is right for your business

Every type of plan has its own advantages and disadvantages. You can find the right type of plan for your business by:

  • Seeing how they stack up against one another in certain key areas, and

  • Becoming aware of the benefits and potential drawbacks of each type of plan

To make it easier for you, here is some essential information to help you decide. We have identified seven key areas that can be used to determine how each type of plan stacks up against each other. In addition, we have listed some types of plans that are generally considered appropriate for small businesses.

Tip: It is always best to have a tax adviser and other professionals help you evaluate your options and select an appropriate retirement plan.

Seven key areas to compare

You can determine the best plan for your company by first seeing how the various types of plans compare in these seven key areas:

  1. Maximizing yearly contributions/building retirement benefits for you as the owner

  2. Maximizing/weighting contributions for you and other highly compensated employees rather than for lower-compensated employees

  3. Flexibility in making contributions each year

  4. Building retirement benefits for employees

  5. Using the plan as a recruiting tool to attract employees

  6. Using the plan to discourage employees from seeking employment elsewhere

  7. Utilizing income tax deferral on plan contributions and investment earnings

To determine the right retirement plan for your business, keep your goals in mind as you evaluate plans.

Some commonly used retirement plans:

  • Simplified employee pension (SEP) plan: A simplified employee pension (SEP) plan is a tax-deferred retirement savings plan that allows contributions to be made to special IRAs, called SEP-IRAs, according to a specific formula. Generally, any employer with one or more employees can establish a SEP plan. With this type of plan, you can make tax-deductible employer contributions to SEP-IRAs for yourself and your employees (if any). Except for the ability to accept SEP contributions from employers (allowing more money to be contributed) and certain related rules, SEP-IRAs are virtually identical to traditional IRAs.

  • SIMPLE IRA plan: A SIMPLE IRA plan is a retirement plan for small businesses (generally those with 100 or fewer employees) and self-employed individuals that is established in the form of employee-owned IRAs. The SIMPLE IRA plan is funded with voluntary pre-tax employee contributions and mandatory employer contributions. The annual allowable contribution amount is significantly higher than the annual contribution limit for regular IRAs but less than the limit for 401(k) plans.

  • SIMPLE 401(k) plan: A SIMPLE 401(k) plan is a retirement plan for small businesses (generally those with 100 or fewer employees) and self-employed persons, including sole proprietorships and partnerships. Structured as a 401(k) cash or deferred arrangement, this plan was devised in an effort to offer self-employed persons and small businesses a tax-deferred retirement plan similar to the traditional 401(k), but with less complexity and expense. The SIMPLE 401(k) plan is funded with voluntary employee pre-tax contributions (and/or after-tax Roth contributions) and mandatory employer contributions. The annual contribution limits are less than the limits applicable to regular 401(k) plans.