Should I start a retirement plan for my small business?

Many small business owners ask themselves (or their accountant) this question.  Adding that employee benefit can help you get and keep good employees.  It can help you save for retirement and hopefully save your company some tax money, too!

Most people think “401(k)” when they think about company retirement plans.  Those plans come with some fairly complex rules and require annual government reporting.  They have some flexibility when it comes to eligibility, matching, loans, retirement dates, etc. but they come with the added expense of more extensive administration rules.  While some small companies utilize this type of retirement plan for their employees, there are some less-complicated plans available that can be much easier for a small business to implement, maintain and afford.  Many small companies utilize SIMPLE IRAs and SEP IRAs for their employees.
The Savings Incentive Match Plan for Employees Individual Retirement Account (or SIMPLE IRA), started in 1996, was devised as less complicated and yet effective option for a small business (under 100 employees) to put in place for their employees wishing to save money for retirement.  The accounts are IRAs so that means they are established for each individual.  The company is responsible for a small contribution of 2% or matching employee salary deferrals (up to 3% of salary for those eligible) and submitting the contributions to the custodian on a regular and timely basis.  That is pretty much it!  No annual reporting, the small business doesn’t have to keep track of beneficiaries or account statements and when someone leaves the company, there are no distribution forms to provide because the account is already an IRA.  This combines the feel of a 401k to the participant in that they defer some of their pay pre-tax, the company matches the contribution, and the participant gets to choose the investment options for their money.  The small business doesn’t have to maintain a big file of reports, statements, beneficiary or distribution forms.  Contribution limits are $12,500 for 2016 (plus an extra $3,000 for employees over 50) which does not include the company’s money.  Much of the administrative effort falls on the custodian and the investment representative associated with the plan if it utilizes an investment management company.

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A Simplified Employee Pension (SEP IRA) is another fairly easy way to make retirement contributions for employees.  While they are not allowed to defer their own money, they do establish an account where the company can make contributions for their benefit.  The employee just has to open the account and choose their investment process.  Annual contributions are not required so a business could just choose to add money in good years.  The amount of contribution is generally determined as a percentage of pay (up to a limit of 20% for self-employed people or 25% for employees up to an amount of $53,000 in tax year 2016) and must be the same percentage for all eligible employees.  Eligibility requirements are quite low so nearly everyone who works will likely be receiving something if a contribution is made for the year.  The contribution can be made as late as the company’s tax filing deadline so you can know for sure if you’re having a “good year” before you make the decision to make the contribution.
With the labor market tightening and the need for all to save something for their retirement, adding a qualified plan like a SIMPLE, SEP or some other plan, may be a great boost to your business and your future.  There are many considerations that should be discussed with your accounting/tax professional before you put a plan in place.  They will be involved in the process if you do and you want to be sure you know what adding a plan will mean to your business from a financial standpoint.
If you choose to have a plan, there are many choices which provided the flexibility and diversification necessary to respond to changes in the financial markets along with each investor’s needs and objectives.  Be sure to choose one where your employees can get their questions answered and account changes handled by knowledgeable, professional people with experience.  You don’t want to turn a benefit into a problem as the result of poor service or investment results.
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Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. 
George Meyer CFS, AIF
LPL Financial
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George Meyer is a registered representative with LPL Financial.  Securities and advisory services offered through LPL Financial, Member FINRA/SIPC.  He has over 20 years of experience in helping small businesses establish SIMPLE and SEP IRAs.  He can be reached at www.parkmeyeradvisors.com.

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