INSIGHTS
Retirement Plans for Small Employers and Self-employed Individuals
by Manika Bhandari, CPA
Retirement saving is a lifelong commitment. If you pick a plan that’s best fit for your business and employees, you’ll keep the plan longer, have fewer problems and be more satisfied with your commitment. A retirement plan can also help a business attract and keep quality employees. Let’s take a quick look at the types of retirement plans available for small businesses.
A retirement plan can be implemented by many types of entities, from self-employed individuals or sole proprietors to partnerships, corporations and nonprofit organizations. Of course, some plans will be a better fit than others, depending on your business’s entity type. However, no matter how financially successful your business may be — there is a retirement plan to fit your needs.
There are two basic types of retirement plans – the Individual Retirement Account (IRA)-based plans and Qualified plans. The IRA-based include payroll deduction IRAs, Simplified Employee Pension Plan (SEP) IRA, and SIMPLE IRA plan (Savings Incentive Match Plan for Employees). The Qualified plans include defined contribution plans such as profit sharing and 401(k) and defined benefit plans.
IRA-Based Plans
The IRA-based plans are the least complicated plans to administer. These plans all use an IRA to hold the contributions. An IRA is set up for each eligible employee and contributions are made to that employee’s IRA. The role of the employer in these plans is minimal — the employer simply offers employees the opportunity to have after-tax amounts deducted from their pay and contributed into their IRA. Employees decide whether and how much to contribute.
These plans have very little paperwork, and no Form 5500 Series Federal tax return is required. However, IRA-based plans are less flexible than Qualified plans.
Qualified Plans
Qualified plans have more of an administrative burden compared to IRA-based plans. These plans are generally held in a single qualified trust where assets are held in individual IRAs established for each participant. The plan is required to be operated for the benefit of all participants who have reached age 21 and work 1,000 hours over the 12-month period after hire.
According to IRS, 401(k) plans are the most popular plans for employees right now, which is a Profit-Sharing Plan that also allows employees to choose to have a portion of their salary deferred into the plan. This type of plan requires an annual non-discrimination test (unless your plan design is covered under the Safe Harbor Plan). This testing requirement is where the Qualified Plan types can be more administratively burdensome to an employer.
A retirement plan has benefits for both the employer and the employee. It can jump-start your savings, take advantage of tax benefits and give your money a chance to grow; all while attracting and retaining employees. If you’re ready to have a conversation on which retirement plans might be right fit for you, give us a call.
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Manika Bhandari, CPA
Senior Associate
Manika Bhandari is a Senior Associate who specializes in serving businesses with their financial statement needs. She also plays a role on the firm’s construction industry team, with specialized knowledge in this sector.