Small Business Advice
Retirement plan options for small businesses
Q: I have decided to offer my employees a company sponsored retirement plan. Can you explain the available options?
A: You are wise to offer this benefit to your employees. In addition to health insurance, a retirement plan is a great way to maintain and show your appreciation to loyal workers. It also enables you, the employer, to make the most of your business assets, including immediate tax deductions for employer contributions.
The following are four retirement plan options recommended by Tom Kozusko, CPA, with CFO Professional Services PC, a bookkeeping and tax preparation service in Richmond, Virginia.
A Simple IRA allows employees to contribute a percentage of their salary up to $12,500 in 2017. If the employee is age 50 or over they may contribute an additional $3,000. Employers can either match employee contributions dollar for dollar, up to 3% of their wages or make a fixed contribution of 2% of pay for all eligible employees.
Simplified Employee Pension Plan allows employers to set up a type of individual retirement account, known as a SEP IRA, for themselves and their employees. Employers must contribute a uniform percentage of pay for each employee, limited to 25% of employee’s annual salary or $54,000, whichever is less for year 2017. Businesses are not required to make contributions every year, thus allowing some flexibility when business conditions vary. SEP plans can even be started by self-employed individuals.
401(k) Plans have become a widely accepted savings vehicle for small businesses and allow employees to contribute a portion of their own incomes towards their retirement. The employee contributions -- not to exceed $18,000 in 2017 -- reduce the participant’s pay before income taxes. If the employee is age 50 or over they may contribute an additional $6,000. The employer may offer to match a certain percentage of the employee’s contribution. While more complex, 401(k) plans offer higher contribution limits than Individual or Simple IRAs.
Profit Sharing Plans are unrelated to any amount the employee chooses to contribute and are well suited for businesses with uncertain of fluctuating profits. They can include options such as length of service requirements, vesting schedules and plan loans that are not available under SEP plans. Contributions may range up to 25% of eligible employee’s compensation, to a maximum of $54,000 per employee in 2017. Contributions need not be the same percentage for all employees and cannot exceed 25% of the total compensation of the employees participating in the plan.
You are advised to seek the advice of a qualified CPA or tax attorney in implementing any of these retirement plan options.
Gray Poehler is a volunteer with the Naples Chapter of SCORE.
A SCORE counselor since 2005, Gray Poehler owned and operated an independent insurance agency with 20 employees and two locations. He has earned the Certified Insurance Counselor designation and is familiar with both personal and commercial property and casualty insurance. Areas of expertise include: Business Finance and Accounting; Business Strategy and Planning; Business Operations; Human Resources and Internal Communications; Sales, Marketing and Public Relations.
To learn more about management issues of small businesses, contact the SCORE office nearest you.