Home > Tax Articles > Retirement Solutions for Small Businesses

Retirement Solutions for Small Businesses

Small businesses may not be able match larger companies for the most capable employees.  One common factor in leveling the playing field is through employee benefits. In addition to the required benefits, employers who offer some form of a retirement plan make themselves more appealing to prospective employees.  Many employers shy away from offering retirement plans out of fear that they're too expensive and confusing to manage.  Fortunately for small business owners, if you know what to look for and what's reasonable, there's a good chance you'll find an option that works.  Check out this quick guide for a basic understanding of the most popular retirement solutions for small businesses.


Simplified Employee Pension Plans

Also know as SEPs and SEP IRAs, Simplified Employee Pension Plans are simple, cost effective, and generally a good option for small businesses.  Funded through tax-deductable employer contributions, SEP IRAs are easy to establish and take little management.  Plan highlights include:

-Available to all business owners, self-employed individuals, and employees who have worked for a businesses at least 3 of the previous 5 years and earned at least $450 in the last year (All qualifying employees must be covered).
-High contribution limits: Employers can contribute up to 20%-25% of compensation with a limit of $49,000 and must contribute the same percentage (as their own) to eligible employee accounts.  Employees do not contribute.
-Can be opened with a bank, insurance company, or brokerage firm within minutes and can be opened as late as the extended due day of your income tax return.
-Contributions can be adjusted depending on your cash flow and do not have to be contributed to every year.
-Vesting is immediate.
-No annual government reports required.


SIMPLE IRAs (Savings Incentive Match Plan for Employees) are another popular, realistic retirement option for small businesses.  SIMPLE IRAs are good for employers because they allow an employee contribution and good for employees because they mandate an employer match.  Unlike SEP IRAs however, these plans do not allow for as high of contributions.  Plan highlights include:

-Available to all employers with 100 employees or less that do not carry any other retirement plans.  All employees earning at least $5000 in the current year who have earned at least $5000 in any two previous years are eligible.
-Contribution limits: Employers and employees can contribute up to $11,500 with an employer match of up to 3%.  Additional funds can be accumulated after a certain age.
-Allows for larger contributions from lower-salaried employees than other plans.
-Vesting is immediate.
-Simpler and less expensive administrative requirements.

Profit-Sharing Plans

Profit-sharing plans are a less common form of retirement plan for small businesses due to the fact that they can be costly and complex.  In this plan, employees are entitled to a portion of their company's profits with annual contributions made to a retirement account.  Plan highlights include:

-All business owners and generally all employees who work at least 1,000 hours during the previous year are eligible.
-Contribution limits: Employers contribute from 20%-25% of salary or self-employment from company profits into your pension plan.  Employees do not contribute.
-Because contributions are based on a business's performance, yearly contributions will vary.
-Vesting periods are determined by employers however vesting often takes a considerable amount of time.
-The administration duties that are required of these retirement plans generally require professional management.


Similar to profit sharing plans, 401(k)s tend to be more expensive and complex and therefore are slightly less common for small businesses; however, 401(k)s have recently become more popular among small businesses.  As competition increases among 401(k) providers, plans for small businesses have become more reasonable.  401(k)s allow employees to make retirement savings by contributing fund from their paycheck and deferring current taxes on the saved money until withdrawal.  Plan highlights include:

-Generally all businesses and all employees who worked at lease 1,000 hours in the previous year are eligible.
-Employers often match employee contributions into their 401(k) account however employer matching is not required.
-Contribution limits: Combined savings of employee contributions and employer matchings cannot exceed $49,000.
-Vesting is determined by employer however employer contributions generally take many years to vest.
-The administration duties that are required to manage a 401(k) can be expensive.

Tax and finance laws are constantly changing.  It is recommended that you consult a lawyer, account, and small business expert when choosing to provide a retirement plan for your small business.

Go to Tax Rates Home Page


Tax Rates
Tax Rates
Global Average Tax Rates
Historical Tax Rates
Tax News
Tax Videos
Tax Articles
IRS Tax Forms

© 2009-2012 TaxRates.cc
2011 - 2012 Tax Rate Guide and Tax Help Website