As the owner of a small or mid-sized business, offering retirement plans for your employees is a good idea. Not only is it a way to build trust and loyalty among your employees, but it makes it easier to attract potential employees to your business. There are a number of different retirement accounts that you can choose, all with various benefits. The following are some of the retirement accounts that you should consider and what you should know about them:
A SEP IRA (Simplified Employee Pension Individual Retirement Account) lets employers contribute upwards of either 25 percent of the employee’s compensation or $54,000 to their retirement account. A SEP IRA is also 100 percent funded by the employer and the employee does not contribute to it.
Although the employer isn’t required to make a contribution to their employees’ SEP IRA every year, they are required to contribute the same percentage each year that they may contribute for themselves in any given year. These plans are easy for business owners to set up and provide a lot of flexibility.
A SIMPLE IRA (Savings Incentive Match Plan for Employees Individual Retirement Account) is similar to a SEP IRA in that it’s designed for employers that have fewer than a hundred employees to set up an IRA for every one of their participating employees.
The main difference is that employees can make salary deferral contributions of upwards of 100 percent of their compensation as long as it doesn’t exceed $12,500. Additionally, as the employer, you must either match your employees’ contributions equally for upwards of three percent of their compensation or contribute at least two percent of the compensation of every employee that is eligible.
Traditional 401(k) Plan
The traditional 401(k) plan is the most common type of retirement plan. It lets employees contribute a part of their wages to their individual retirement accounts. As the employer, you can then make or match contributions. With a traditional 401(k) plan, you will be subject to annual qualifying tests by the IRS. You’ll also be able to reclaim any contributions you make if the employee leaves your company before a certain set time. All 2017 401(k) plans have $18,000 contribution limits, with $6,000 catch-up contributions for employees 50 and over.
Safe Harbor 401(k) Plan
A Safe Harbor 401(k) plan allows employees to contribute a part of their wages to their retirement account. As the employer, you have the option to make or match the contributions, but they will be vested as soon as they are made. These types of 401(k) plans are not subject to annual IRS tests and allow employees to take what’s in their 401(k) plan with them when they leave your company.
SIMPLE 401(k) Plan
The SIMPLE 401(k) plan is ideally suited for smaller companies and can only be implemented by businesses with less than a hundred employees. The main difference between the SIMPLE 401(k) and the Safe Harbor 401(k) is that employees are allowed to make Roth contributions with a SIMPLE 401(k) plan, whereas they are not allowed to do so with a Safe Harbor 401(k).
These are a few of the retirement accounts that you may want to consider for your employees. Choosing between the different plans requires you to take into account various factors, such as how many employees you have, if you want to maximize your contributions and if you want employees to be able to contribute, to name a few. For additional advice and information concerning retirement accounts for your small to mid-sized business, be sure to contact us at Valezar & Associates today.