Employee retirement plans can be an effective tool to build a large retirement nest egg and secure post retirement life. They are a valuable option for employees and serve as an incentive to continue working with the firm, resulting in reduced absenteeism and employee turnover.
Employers can benefit from offering retirement plans to employees for a number of reasons. Offering a retirement plan can help attract talented employees. In addition, employers can receive tax deduction for matching contributions to the retirement account.
For small business owners, the question is therefore not whether they should offer a retirement plan to the employees or not, but what type of retirement plan should be offered to the employees.
The choices are many when it comes to implementing a retirement plan: Profit sharing plan, 401(k) plan, simplified employee pension (SEP), Simple IRA, to name just a few. Here, we will briefly give an overview of some of the best plans that small business owners can offer to the employees.
Defined Benefit Retirement Plan
A defined benefit pension plan is designed to provide a specific amount at retirement. This is the traditional pension plan in which the employer bears the risk of providing the promised level of retirement benefits to participants.
Profit Sharing Retirement Plan
Profit sharing retirement plans provides flexibility and control over contributions made to the account. A company can determine how much amount it will contribute to the account. It can invest the amount at its discretion that results in optimum benefit for both the company and the employee.
A type of profit sharing plan is age weighted plan that calculates contributions based on the age and compensation of the employees. This is similar to the defined benefit pension plan with the difference that it entails discretionary contributions. Treasure regulations Section 401(a) (4) allow profit sharing plan to be based on benefits that are anticipated at the time of retirement instead of the level of contributions during a particular period.
Simplified Employee Pension (SEP) plans
A simplified employee pension plan (SEP) has minimal reporting requirements similar to a traditional pension plan. The employer deposits contribution to the individual retirement account instead of an employee trust account, which greatly simplifies the accounting process. These plans are established under the IRS Model 5305-SEP form.
Simple and Roth IRA Retirement Plans
An individual retirement account (IRA) is a popular retirement plan that is simple to administer and implement. Tax free matching contributions can be made to the account up to a prescribed limit set by the IRS, which for 2015 and 2016 amounted to $5,500 (or $6,500 if you are 50 years or older).
Another retirement account is the Roth account that is different from simple IRA in that the taxes are levied on contributions, but withdrawals are tax free. This makes Roth IRA perfect for young and low income employees who will benefit from tax free post retirement withdrawals and won’t miss out on the upfront tax. There is also a SEP IRA pension plan that is fully funded by an employer instead of a matching contribution.
401(k) Retirement Saving Plans
401 (k) retirement plans include simple, Roth, Safe-harbor, and owner only plans. The simple and Roth 401(k) retirement plans are similar to simple and Roth IRA with the difference that the employer set the maximum contribution limit and not the IRA. Moreover, employees are not permitted to take loan from their IRA accounts, but they can do so with 401(k) retirement plan. In addition, Roth 401 (k) plan permits employees to make after-tax salary deferrals into the plan.
A safe harbor 401(k) plan is different in that nondiscrimination tests are not employed, and all employees can maximize the deferrals. Lastly, an owner only/one-person 401(k) is allowed to shareholders/partner/owner of a small business and their spouses to optimize their contributions in case the net compensation is below a certain limit.…Read More