Navigating the Small Business Retirement Plan Landscape

Whether you are the sole owner and operator of your small business or you employ hundreds of people, having the right employee retirement plan is one of the most important benefits you can offer your employees.  As a small business owner, you want to attract and retain the best people. You also want to receive income from the business in the most tax efficient way. This is why navigating the retirement plan landscape and selecting the right plan is important.  The Internal Revenue Service (IRS)  highlights these retirement plan benefits for businesses and their employees: 

Business Benefits

• Employer contributions are tax-deductible.
• Assets in the plan grow tax-free.
• Flexible plan options are available.
• Tax credits and other incentives for starting a plan may reduce costs.
• A retirement plan can attract and retain better employees, reducing new employee training costs.

Employee Benefits

• Employee contributions can reduce current taxable income.
• Contribution and investment gains are not taxed until distributed.
• Contributions are easy to make through payroll deductions.
• Compounding interest over time allows small regular contributions to grow to significant retirement savings.
• Retirement assets can be carried from one employer to another.
• Saver’s Credit is available.
• Employees have an opportunity to improve financial security in retirement.

When it comes to choosing the right employee retirement plan there is not a one-size-fits-all option. In fact, there are a variety of options including 401k, Simple IRA, Simplified Employee Pension (SEP) IRA, Profit Sharing Plans, and Cash Balance Plans. To help you get started in the decision process, here is an overview of the most common retirement plans. 

401k Plans

In 2018 the Department of Labor (DOL) stated that approximately 55 million US workers participate in a 401k plan, making it one of the most widely recognized retirement plan options.  Within the 401k category, options vary widely with plans like Safe Harbor, Automatic Enrollment, and Solo 401ks in addition to a traditional 401k plan. 

There are also add on plans like Profit Sharing Plans or Cash Balance Plans.  As you would expect with all these options, the plans vary significantly from one to the next depending on the employer. There are a two things they all have in common. 

1. The plan is funded by employee contribution along with employer matching contributions.
2.  When establishing the plan, employers have some flexibility in the percentage they wish to match. 

The contribution limits and flexibility employers have in plan design make it a popular choice among many businesses. The one drawback is the higher cost of startup and administration, which makes many small businesses look for more cost-effective options.

SIMPLE IRA Plans

SIMPLE IRA plans are available for businesses with fewer than 100 employees. Like the 401k plan, SIMPLE IRA’s are funded with both employer and employee contributions. The one difference is that employers have less flexibility in how much to match. Employee contribution limits in 2019 for SIMPLE IRA are $13,000 and an additional $3,000 catch up for those over 50. There is very little start up or administration cost associated with this type of plan, making it attractive to many small businesses.

SEP IRA Plans

One of the key differentiators of a SEP IRA plan is that contributions do not come from the employee, only the employer, and must be the same percentage of salary for all employees. This can deter employers who want to have employees take part in their own retirement savings. However, for employers with few or no non-owner employees it can be a great option. 

Contribution limits are higher at 25 percent of employee compensation or $56,000. This offers owners a way to defer more and reduce taxable income.  While limits are higher, contributions are also discretionary and allow employers to put away more in good years and keep more money in the business when needed. 

While these are the most common plan types, many more exist and there are options to consider within each plan.  Northwest Bank strongly recommends small business owners seek professional guidance when evaluating and selecting the plan that’s right for their business.

One resource we recommend small business owners download and review is the DOL’s publication, Choosing a Retirement Solution for Your Small Business.

Northwest Bank’s Wealth Management Advisors are ready to help you every step of the way and provide the tools and resources to reach your goals.

Advisors represent Northwest Wealth Management, a Registered Investment Advisor and affiliate of Northwest Bank.
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