Every small business owner wants to attract the best employees. One reason that employees sometimes choose to work for larger companies is that smaller companies don’t offer the same benefits. Offering employees a retirement plan will help with bringing on great employees, inspire loyalty, and possible make you feel good about yourself.
Another benefit is that you, as an employee of your company, will be eligible to benefit and be able reap personal tax benefits.
There are lots of options for retirement plans. You should definitely speak to your accountant before choosing a direction. However, this article will explain the basic choices you have, and their pros and cons.
What’s Out There
We’ve chosen a few plans for your consideration as your shop for benefits. Let’s start with the least labor intensive and work our way down the line.
- Payroll Deduction Traditional, IRA or Roth
With this option, you’re out of the picture altogether. It’s up to the employees to set an amount to be deducted from every paycheck they receive from you.
- The SEP or Simplified Employee Plan
In a nutshell, the funds come solely from the employer’s contributions. These contributions are tax deductible for the employer, a business expense. The employer makes contributions as a percentage of employees’ wages. All employees that qualify must receive the same percentage. However, the employer is not required to keep the same percentage every year or even contribute every year. Some other details:
- Eligible for folks who’ve been on the job for 3 out of 5 years and are over 21.
- They must make at least $550 in wages or compensation during the year.
- Those workers under that amount (non-resident aliens and union employees can be covered, but it’s up-to you. It’s not a requirement).
- The small business owner can also get on this train. What you put in for yourself is based on a formula: Net profit minus half of the self-employment tax minus the SEP contribution. (Net Profit – ½ Self Employment Tax – SEP Contribution)
- Taxwise, you can contribute a maximum of $51,000 per employee of per year, or 25 percent of every participant’s compensation, whichever number is lower.
- You’ll be eligible for a tax credit of up to $500 a year for the first 3 years when you kick off this plan.
- The 401(k)
With this one, there are a couple of different plans.
■ A Simple IRA – Matching what the employees put aside for their later years. This option is recommended for small business startups. Less than 100 workers? This one might be for you. Drilling down, here’s what you need to know:
- You’ll have to match up to 3 percent, if the employee is on board and contributing.
- If they’re not, the small business owner only has to feed it 2 percent.
- Figure in an employee’s compensation up to $260,000 in 2014 as the contribution limit.
- The involvement is written in stone for all employees who have received compensation any time within the 2 preceding calendar years (of at least $5,000), and expect to get at least $5,000 in the current calendar year.
- Workers can’t put in more than $12,000. That is, unless they are over 50. Then they can toss in an additional $2,500.
- As an employer, you can contribute to the fund. All parties need to be forewarned, there are certain requirements the IRS has with a traditional 401(k). Talk to your accountant for details.
■ Safe Harbor
- Here’s one that’s a little looser. It’s not subject to the rigmarole of complicated, annual, non-discrimination tests that the Traditional 401(k) is subjected to.
- Since this option runs on autopilot, it increases how many employees will get involved. And like the safe harbor concept, you can usually avoid those pesky non-discrimination tests.
■ Simple 401(k)
- You’ll need to have fewer than 100 employees to take advantage of this one. Employees need to have a thousand hours, in any year, under their belt, and they must be at least 21. The total amount employee and employer can shovel into the plan is $52,000 in 2014. Fifty years or older, the employee can put in an additional $5,500.
This should give you an idea of what’s out there. Our advice, have your accounting people perform some due diligence before taking advantage of any of the options we’ve outlined above. Wouldn’t hurt to get some legal advice, too.