Which retirement plan is right for your business?
If you are a small business owner, there are many pension plan alternatives to help you and your eligible employees save for retirement. For most private business owners, a Simplified Individual Retirement Account for Employees (SEP IRA) was once the most cost effective choice. Then, the Employee Savings Incentive Plan (SIMPLE IRA) became a viable alternative. Today, you may find that a Defined Benefit or 401 (k) plan best suits your needs. To make an informed decision on which plan is best for your business, carefully consider the differences before choosing.
Simplified Individual Retirement Account for Employees (SEP IRA). This plan is flexible, easy to set up and has low administrative costs. An employer signs a plan adoption agreement and SEP IRAs are set up for each eligible employee. When choosing this plan, keep in mind that it does not allow employees to save through payroll deductions and that contributions vest 100% immediately.
The maximum that an employer can contribute each year is 25% of an employee’s eligible earnings, up to a maximum of $ 290,000 for 2021. However, the contribution for an individual cannot exceed $ 58,000 in 2021. Employer contributions are generally discretionary and may vary from year to year. year. With this plan, the same formula must be used to calculate the contribution amount for all eligible employees, including owners. Eligible employees include those who are 21 years of age and over and those who have been employed (part-time and full-time) for three of the past five years.
Employee savings incentive plan (SIMPLE). If you want a plan that encourages employees to save for retirement, a SIMPLE IRA might be right for you. In order to choose this plan, you must have 100 or fewer eligible employees who earned $ 5,000 or more in compensation during the previous year and not have any other employer-sponsored pension plan to which contributions were made. paid or accrued during that calendar year. There are no annual IRS filings or complex paperwork, and employer contributions are tax deductible for your business. The plan encourages employees to save for retirement through payroll deductions; the contributions are immediately vested at 100%.
The maximum salary deferral limit for a SIMPLE IRA plan cannot exceed $ 13,500 for 2021. If an employee is 50 years of age or older by December 31, an additional catch-up contribution of
$ 3,000 is authorized. Each year, the employer must decide to do either a matching contribution (the lesser of the employee’s salary deferral or 3% of the employee’s compensation) or non-equivalent contribution 2% of an employee’s compensation (limited to $ 290,000 for 2021). All plan members must be notified of the employer’s decision each year no later than November 2 of the following year.
Defined benefit pension plan. This type of plan can be a good solution for a profitable business with stable cash flow with the intention of benefiting employees over 40. This type of plan can also help you build up savings quickly. It typically produces a much larger tax deductible contribution to your business than a defined contribution plan; however, annual employer contributions are compulsory since each participant is promised a monthly benefit at retirement age. Since this plan is more complex to administer, the services of a registered actuary are required. All plan assets must be held in a common account and your employees cannot direct their investments.
Certain factors affect an employer’s contribution to a plan, such as the present value of plan assets, age of employees, date of hire, and compensation. A participating employee with a large projected profit and only a few years before the normal retirement age generates a large contribution because there is little time to accumulate the value necessary to produce the declared profit at retirement. The maximum annual retirement benefit is the lesser of 100% of the employee’s compensation or $ 230,000 per year in 2021 (indexed for inflation). The design of this plan should only be considered with a view to substantial annual funding for at least 5 years.
401 (k) plans. This plan may be right for your business if you want to motivate your employees to save for their retirement and give them a way to participate in the profitability of the business. 401 (k) plans are best suited for businesses looking for flexible contribution methods.
When choosing this type of plan, keep in mind that both the employee and the employer have the option of contributing. The maximum wage deferral limit for a 401 (k) plan is $ 19,500 for 2021. If an employee is 50 years of age or older by December 31, an additional catch-up contribution of
$ 6,500 is authorized. The maximum amount that you, as an employer, can contribute is 25% of the total compensation of the eligible employee (capped at $ 290,000 for 2021). Individual allowances for each employee cannot exceed the lesser of 100% of compensation or $ 58,000 in 2021 ($ 64,500 if 50 or over). The allocation of employer profit-sharing contributions may be biased in favor of older employees, if age-weighted characteristics and new comparabilities are used. Typically, IRS Forms 5500 and 5500-EZ (along with applicable schedules) must be filed annually.
Once you have reviewed your business goals and objectives, you should check with Joe DiGiacomo Senior Vice President, Investments / Financial Advisor to assess the best retirement plan option for your financial situation.
Joseph G. Di Giacomo
Senior Vice-President – Investment Officer
Wells Fargo Consultants | 131 Continental Drive, Suite 102, Christiana Executive Campus | Newark, DE 19713
Phone 302-731-2131 | Toll free 800-355-2130 | Fax 302-731-7111
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