One of the benefits of owning your own business is the ability to select the type of retirement plan that is right for you and your employees. Below is a brief summary of the primary retirement plan options available to small business owners.
SEP IRA
A Simplified Employee Pension (SEP) IRA is a great option for high-earning solo entrepreneurs. These are easy to set up and have generous contribution limits. Contributions are discretionary, so you’re never locked into a formula. But, because all of the contributions come from the business, they may be best for solo professionals or family businesses.
Employer contributions: Limited to the smaller of $56,000 or 25% of compensation. For partnerships and sole proprietorships, compensation is net income. For corporations (including S-corporations), compensation is wages. All contributions come from the employer. If you have employees, you must contribute a proportional amount of their compensation to their accounts.
Employee contributions: None.
Deadline to set up: Up to the due date of business tax return, including extensions.
Deadline for contributions: Up to the due date of business tax return, including extensions.
Limit on the number of participants: No
Roth option available? No
Annual filing required? None
SIMPLE IRA
A Savings Incentive Match Plan for Employees (SIMPLE) IRA is a good option for small, lean companies with a long horizon for saving. Contribution limits for SIMPLE plans are lower than for other plan types, but the ease of setting them up and administering them can make up for that.
SIMPLE plans can also be structured as 401(k) plans. The 401(k) option allows participants to borrow against their balances and to take hardship distributions. These plans also require the annual filing of Form 5500 with the IRS every year.
Employer contributions: Mandatory contributions of either 2% of employee compensation for all employees OR up to 3% matching contribution for participating employees.
Employee contributions: Salary deferral up to $13,000 plus $3,000 catch-up contribution if over age 50.
Deadline to set up: New plans must be set up between January 1 and October 1.
Deadline for contributions: Employee portion must be paid within 30 days of the end of the month. Employer contributions must be paid by the due date of company tax return, including extensions.
Limit on the number of participants: Limited to 100 participants.
Roth option available? No
Annual filing required? None for SIMPLE IRA; annual Form 5500 required for SIMPLE 401(k).
Self-Employed or Solo 401(k)
As the name implies, these are 401(k) plans covering one person, or one person plus a spouse. The solo business owner makes contributions both as an employer and as an employee. These have higher contribution limits than SIMPLE plans and allow a Roth option for employee contributions.
Employer contributions: Up to 25% of wages or 25% of net self-employment income less one-half of self-employment tax and employer contribution. Total contributions for the employer and the employee portions are limited to $56,000 (plus catch-up contributions).
Employee contributions: Salary deferral up to $19,000 plus $6,000 catch-up contribution if over age 50. The $19,000 limit is for all 401(k) plans that an individual participates in.
Deadline to set up: December 31.
Deadline for contributions: S-corporation shareholders must make salary deferrals by December 31; employer contributions and contributions from self-employment income must be made by the due date of tax return including extensions.
Limit on the number of participants: Limited to business owner and spouse.
Roth option available? Yes, for employee contributions only.
Annual filing required? None until plan assets exceed $250,000, then annual Form 5500-SF.
401K Plans
For many small businesses, a 401K may be the best option. Read our article Should You Offer a 401K Plan? to find out if this is the right plan for your business. While administering these plans takes more effort and resources, they also offer the most flexibility for growing businesses. These can be set up as traditional or as safe harbor plans.
Employer contributions: Up to 25% of wages up to $280,000 in compensation. Total employee and employer contributions to a participant’s account are limited to the smaller of 100% of compensation or up to $56,000 plus $6,000 catch-up contribution if over age 50.
Employee contributions: Salary deferral up to $19,000 plus $6,000 catch-up contribution if over age 50. The $19,000 limit is for all 401K plans that an individual participates in.
Deadline to set up: December 31.
Deadline for contributions: Employee contributions must be paid as soon as possible, but no later than the 15th day of the month after contributions were withheld from wages. Employer contributions must be made by the due date of tax return including extension.
Limit on the number of participants: None.
Roth option available? Yes, for employee contributions only.
Annual filing required? Annual Form 5500.
As you can see in this overview, there are multiple options available for small businesses. The best option for your business depends on many factors and may change as your business grows and changes. Contact us today to find out the best option for your small business!