Why set up a Small Business 401Ks or SEP
Setting up a retirement plan for your small business is a good way to attract potential employees. Not all small businesses offer retirement plans; in fact, it’s estimated that around 55 million employed Americans do not have the option of a retirement plan through their employer. When it comes to employers that do have retirement plans, defined contribution plans, such as 401(k)s are the most popular. However, a 401(k) retirement plan isn’t your only choice. Another option is the SEP IRA (Simplified Employee Pension Plan). Compare the following benefits of both to determine which type of retirement plan will best suit your employees:
A 401(K) Retirement Plan
A 401(k) allows employees to make contributions out of their paychecks to their retirement fund, usually up to three percent. You can choose to match what they contribute. Some companies will match employee contributions by 100 percent. The highest employee contribution limit on 401(k)s is $18,000, while the catch-up contribution limit for employees that are 50 and over is $6,000.
401(k)s offer flexible eligibility, vesting, distribution and contribution options. Additionally, your employees can make either pre-tax or after-tax (Roth) contributions. Last but not least, with a 401(k) plan, you can offer your employees with the option to be able to take employee loan and hardship withdrawals from their retirement funds.
While there are certainly a lot of benefits to offering a 401(k) plan to your employees, it’s worth noting that there are a few small drawbacks. For example, the ERISA compliance requirements are more complex – and this includes annual discrimination testing for non-safe harbor plans. The administration costs of using 401(k) plans tend to be higher as well when compared to other IRA plans.
An SEP IRA Retirement Plan
SEP IRA plans are good alternatives to 401(k) plans for small businesses who want to help their employees save for retirement but don’t need some of the main selling points of a 401(k) plan, such as design flexibility or high contribution limits. A SEP IRA plan allows a maximum contribution that’s the lesser of 25 percent of the employee’s compensation or $53,000.
A SEP IRA also boasts lower administration costs and is relatively easy to set up and operate compared to a 401(k) plan. It also doesn’t require discrimination testing or a Form 5500, unlike the use of 401(k) plans. The drawback to using SEP IRA retirement plans, however, is that employees can not make contributions and you will have to contribute equally for all of your eligible employees.
As a small business owner, you should carefully consider the various retirement plan options that you can provide to your employees. The mistake that many small business owners make is to neglect to compare all the options, which often results in the decision to offer no plan at all. A retirement plan, whether it’s a 401(k) or an SEP IRA plan, can benefit your employees and can also help to attract potential employees who might choose to go elsewhere if you have no retirement plan to speak of.
It’s also worth noting that contributions you make are tax-deductible and that you could also take advantage of tax credits and other financial incentives for implementing either of these retirement plans. If your small business is in need of additional professional guidance regarding your retirement plans – or guidance in regards to accounting, bookkeeping and tax planning in general, then be sure to contact us at Valezar & Associates today.