Employer-sponsored retirement plans can have many benefits for your employees and your business. Meeting increasing employee expectations, retaining top talent, and helping employees save for their future are just the start. Companies that offer retirement plans are also eligible for significant tax breaks and deductions, which can help your bottom line. You can help to secure your own retirement at the same time, as well. And, you can establish a plan even if you are self-employed.
Setting up an employer-sponsored retirement savings plan can be easier than many business owners think. But, with so many options out there, it can be hard to know which employer-sponsored plan to choose.
To help you understand the options, we’ve developed a three part guide to employer-sponsored plans so you can easily understand the different options, pros, and cons.
Most employer-sponsored retirement plans fall into one of three categories: Individual Retirement Accounts (IRAs), defined contribution plans, or defined benefit plans. Under each of these three types are specific retirement vehicle options which we will discuss in this blog and in the upcoming blogs.
- Individual Retirement Accounts (IRAs)
The first that we’ll discuss are the IRA options. Even though these are labeled “individual” retirement accounts, you as an employer can help your employees set up and fund them as your retirement plan option. With an IRA, the amount that an individual receives at retirement depends on the funding of the IRA and the earnings (or losses) on those funds.
- IRA-Based Plans
SEP IRA[i]
SEP IRAs are easy to setup and maintain and are eligible to businesses with one or more employees. They are super easy to set up using IRS Form 5305-SEP and there are no annual filing requirements for the employer. The employer can decide when to make contributions year-to-year. However, the plan must be offered to all employees who are at least 21 years old, employed by the employer for 3 of the last 5 years, and had compensation over $650 for 2021 and for 2022.
SEPs isn’t allow employee contributions, but employers can add up to the lesser of $61,000 ($66,000 in 2023) or 25% of an employee’s salary.
SIMPLE IRA[ii]
"SIMPLE" stands for "Savings Incentive Match Plan for Employees,” and is a tax-deferred retirement savings plan that most small businesses with 100 or fewer employees can use. SIMPLE IRAs are easy to set up, and they can be a good option for small businesses, but they do have some drawbacks. The appeal of SIMPLE IRAs is that they have minimal paperwork requirements, just an initial plan document and annual disclosures to employees. The employer establishes the plan through a financial institution that administers it. To be eligible to establish a SIMPLE IRA, the employer must have 100 or fewer employees. Those who are self-employed or sole-proprietors are eligible to establish a SIMPLE IRA as well.
However, one drawback of SIMPLE IRAs is that the business owner cannot save as much for retirement as with other small business retirement plans, such as the SEP or a 401(k) plan. A SIMPLE IRA also cannot be rolled over into a traditional IRA without a two-year waiting period from the time the employee first joined a plan. Businesses that can afford to set up other plans might consider it.
Participants can contribute up to $14,000 in 2022 ($15,500 in 2023). Those 50 or older can contribute an additional $3,000 ($3,500 in 2023).
In the next two articles we will discuss in more detail define contribution plans and defined benefit plans (aka pension plans) Stay tuned…
This information was developed as a general guise to educate plan sponsors but is not intended as authoritative guidance or tax or legal advice. Each plan has unique requirements, and you should consult your attorney or tax advisor for guidance on your specific situation. In no way does advisor assure that, by using the information provided, plan sponsor will be in compliance with ERISA regulations.
[i]https://www.irs.gov/retirement-plans/plan-sponsor/simplified-employee-pension-plan-sep
[ii]https://www.irs.gov/retirement-plans/plan-sponsor/simple-ira-plan