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Small Business Retirement Plan Options

Goals

To understand the benefits, costs and other notable information on employee retirement plan options for S Corp small businesses.

Early Findings

Simplified Employee Pension Individual Retirement Account

  • The Simplified Employee Pension Individual Retirement Account, also referred to as SEP IRA, is a simple retirement plan that employers and self-employed persons can set up by simply completing IRS Form 5305-SEP and providing a copy to employees. They are attractive to small businesses because they are easy to set up and administer.
  • Employers can make contributions to employee SEPs on a discretionary basis and receive a tax deduction for those contributions. Employers can decide on a yearly basis whether to contribute to the plan or not. This can be beneficial for new companies or during years of economic downturn. Employers can contribute up to 25% of an employees gross annual salary, capping at $57,000 annually.
  • SEP IRAs have higher contribution limits that traditional IRAs. Traditional IRAs have contribution limits between $5,500-$6,500 annually compared to $57,000 annually for SEP IRAs.
  • Employers can receive tax credit for setting up an SEP plan, as well as tax credit for plan expenses and contributions.
  • Contributions made to an SEP IRA are immediately vested, meaning employees can withdraw the funds at any time. Withdrawals are subject to a 10% penalty if the employee is under age 59 1/2.
  • Unlike traditional IRAs, loans are not permitted under a SEP IRA.
  • The Vanguard SEP IRA is considered one of the top IRA products available. Other top providers include Betterment, E-Trade, Fidelity, and TD Ameritrade.

SIMPLE IRA

  • A Savings Incentive Match PLan for Employees (SIMPLE IRA) is ideal for small businesses as they do not carry the startup and operating costs of traditional retirement plans.
  • The plan is easily established by filing Form 5304-SIMPLE or 5305-SIMPLE, however, an employer cannot have any other retirement plans available.
  • With the SIMPLE IRA, employers are required to contribute up to 3% of the employees compensation annually. If an employee elects not to contribute to their own account, employers may elect to contribute only up to 2% of compensation.
  • Employees are 100% vested at the time of contribution, however, they are subject to a 10% penalty if the funds are withdrawn before age 59 1/2 and a 25% penalty if withdrawn within the first two years of participation.
  • Recommended SIMPLE IRA providers include Ally Invest, E-Trade, and TD Ameritrade.

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