February 16, 2020

Retirement plan options for the small business and self-employed

According to the General Accounting Office, only 14 percent of small-business owners provide their employees with any company-sponsored retirement plan. This is a striking figure since more than 50 percent of the private workforce is employed by small businesses, according to the Department of Health and Human Services.

The Business Directory of the Gainesville Chamber of Commerce boasts nearly 1,200 small businesses which employ about 70,000 employees. Many self-employed business owners may not know how to insure their own retirement. Oftentimes, setting up a company sponsored plan presents either too much expense or complexity. There may be options that both keep expenses low and reduce complexity while offering an extra benefit for yourself and your employees.

Even a retirement plan that costs several thousand dollars per year may be cost prohibitive for a small business. Managing a plan can seem to present many challenges that are not a core of the small business. A retirement program, however, may be a great way to acquire and retain talent, especially in the search for highly skilled workers.

The greatest expense is often the employer match, but it is possible
to set up an IRA that only requires employee contributions. Some of the annual costs of a retirement plan can be offset with a tax credit that equals 50 percent of the cost to set up and administer a plan, up to a maximum
of $500 per year for each of the first three years of a plan. Employer contributions are even deductible from an employer’s income.

Defined contribution plans may, in particular, provide incentives to attract and retain highly skilled workers. They permit high salary deferrals and a vesting schedule that an employer has more control over. Employer contributions may require an employee to dedicate a number of years of service to a company before they are entitled to the employer match. This can act as a great retention tool for your highly skilled workers. It is not uncommon for plans to only grant 100 percent vesting until as many as six years of service have been given to the company.

If you are self-employed and have no other employees than yourself, a SEP IRA or “solo” 401(k) may be a good option for you. SEP IRAs allow a contribution of up to $51,000 (as of 2013) with a limitation of 25 percent of your net self-employment income, whichever is smaller. Similarly, a solo 401(k) allows an employee contribution of $17,500 and another 25 percent of compensation (for the employer portion up to a ceiling of $51,000 (as of 2013). When you have more employees than yourself and your spouse, the rules change and you may need to consider a different kind of plan. Key rules regarding plans can be found in IRS Publication 560.

Defined benefit plans, finally, may be an appropriate option for successful business owners, particularly if they are at least 40 years of age, make over $100,000 in annual income and plan to make large contributions. Defined benefit plans enable you to write off contributions as a business expense.

Company sponsored retirement plans may be one way by which business owners can safeguard their own retirement future and that of their employees.

Reminder: Tax laws and regulations change frequently, and their application can vary widely based on the specific facts and circumstances involved. The information contained in here does not constitute specific tax advice.

Source: Abridged from Department of Labor, “Choosing a Retirement Solution for Your Small Business.”

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