Starting Your Business
Retirement Plans for Small Businesses
Retirement plans are savings plans that offer you tax advantages
to set aside money for you and your employees' retirement.
UPDATES:
See Tax Information for Retirement
Plans for the latest retirement plan updates to this Resource Guide.
Whether you choose to have an IRA-based plan such as a SEP, or a SIMPLE, or you choose to have some other type of plan, retirement plans are a great way for you and your employees to save for retirement.
You can deduct contributions you make to the plan for you
and your employees. The contributions and earnings are generally
tax-free until you or your employees receive distributions
from the plan in later years.
All retirement plans have important tax, business and other
implications for employers and employees. Therefore, you may
want to discuss any retirement savings plan with a tax or financial
advisor.
Visit the IRS
web site for more information on retirement plans.
Eligibility Requirements for Participating in a Retirement Plan
Regardless of the retirement plan you choose, certain “eligibility” requirements apply. “Eligibility” means when your employees must be included in the plan – when they must start to have contributions made on their behalf.
For example, if you establish a SIMPLE IRA plan, all your employees become eligible to participate in the plan if they:
- Earned income of at least $5,000 in either of the prior two years
- Are reasonably expected to earn at least $5,000 in the current year
- Are not covered by a collective bargaining agreement (if retirement benefits were the subject of good-faith bargaining).
These are the minimum standards. The requirements can always be more liberal. For instance, your SIMPLE IRA plan could provide for participation as long as the employee earns any compensation. However, the plan could not require the employees be age 25 or that they must have worked for you for at least five years in order to participate in the SIMPLE IRA.
Check with your financial advisor to see what plan and what eligibility standards – tighter or looser – are right for you and your business.
Which Plan is Right for Your Business?
There are many factors to consider when deciding which plan best fits your business. When determining which plan is right for you, consult a financial advisor.
Payroll Deduction IRA
Even if an employer does not want to adopt a retirement plan, it can allow its employees to contribute to an IRA through payroll deductions, providing a simple and direct way for eligible employees to save.
Simplified Employee Pension (SEP)
Simplified Employee Pensions (SEPs) provide an easy method for employers to make contributions to a retirement plan for their employees. Instead of establishing a profit-sharing or money purchase pension plan with a trust, employers can adopt a SEP agreement and make contributions directly to an individual retirement account or an individual retirement annuity established for each eligible employee.
SIMPLE IRA Plan
A Savings Incentive Match Plan for Employees, or SIMPLE, gives small employers a simplified method to make contributions toward their employees’ retirement and their own retirement. A SIMPLE IRA plan includes a written salary reduction agreement between employee and employer that allows eligible employees to choose to have the employer contribute the salary reductions to a SIMPLE IRA established on their behalf.
401(k) Plan
A type of plan that allows employee salary deferrals and/or employer contributions.
SIMPLE 401(k) Plan
A type of plan available to the small business owner with 100 or fewer employees. Under a SIMPLE 401(k) Plan, an employee can elect to defer some compensation. Unlike a standard 401(k) plan, the employer must make either: (1) a matching contribution up to 3% of each employee's pay, or (2) a non-elective contribution of 2% of each eligible employee's pay.
Profit-Sharing Plan
A type of plan that allows discretionary annual employer contributions.
Money Purchase Pension Plan
A type of plan in which employer contributions are fixed.
Defined Benefit Plan
A type of plan that is funded primarily by the employer and whose contributions are actuarially determined.
Important References:
Choosing a Retirement Plan:
Publication 3998 Choosing a Retirement Solution for Your Small Business
Publication 4118 Lots of Benefits
Establishing a Retirement Plan:
Form 5300 Application for Determination for Employee Benefit Plan
Instructions for Form 5300
Form 5304-SIMPLE Simple Incentive Match Plan for Employees of Small Employers (SIMPLE) – Not for Use With a Designated Financial Institution
Form 5305-SIMPLE Simple Incentive Match Plan for Employees of Small Employers (SIMPLE) – for Use With a Designated Financial Institution
Form 5305-S SIMPLE Individual Retirement Trust Account
Form 5305-SA SIMPLE Individual Retirement Custodial Account
Form 5305-SEP Simplified Employee Pension-Individual Retirement Accounts Contribution Agreement
Form 5307 Application for Determination for Adopters of Master or Prototype or Volume Submitter Plans
Instructions for Form 5307
Operating a Retirement Plan:
Form 5500 Annual Return/Report of Employee Benefit Plan
Instructions for Form 5500
Form 5500-EZ Annual Return of One-Participant (Owners and Their Spouses) Retirement Plan
Instructions for Form 5500-EZ
Publication 535 Business Expenses
Publication 560 Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans)
Publication 590 Individual Retirement Arrangements (IRAs
Publication 4222 401(k) Plans for Small Businesses
Publication 4333 SEP Retirement Plans for Small Businesses
Publication 4334 SIMPLE IRA Plans for Small Businesses
Publication 4460 The Retirement Plan Products Navigator
