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Small Business Owners
Wake Up, and Smell Your Employee’s Retirement Plans.
For small businesses, the question isn’t what are your employees doing for you, it’s what are you doing for your employees? Studies—and, well, logic—show that small businesses that help plan for the future of their employees are setting themselves up for growth and success. Plus, guiding them to think smartly about their futures might even earn you a “Get out of jail free” card when you’re demanding to know why that report wasn’t on your desk at 5 pm.
For ease and simplicity in the initial set-up and maintenance, look no further than the name: Simplified Employee Pensions (SEPs). SEPs are a popular way to plan for the future of your employees. Only you, the employer, can contribute to these plans. That said, you can contribute up to 25% of annual W-2 wages, or 20% of net adjusted self-employment income for a maximum of $56,000 (in 2019). Once employees receive payments, they are free to invest on their own, eliminating the need for any plan administration on your part. SEP payments benefit your bottom line as well – all contributions are 100% tax deductible.
Staying with the theme of simplicity, SIMPLE plans differ from SEPs in that both the employer and the employee can contribute. How so? Employees have an option to contribute directly from their salary; employers are then required to match. There are limits to how much each can contribute: employees up to $13,000 in 2019 ($16,000 for those over 50); and for the employers’ match, either 100% of first 3% of compensation or 2% of each eligible employee’s compensation (up to $280,000 of compensation in 2019). This plan puts the power in the hands of the employee, and depending upon your company, this may be brilliant, or brilliantly foolish—only you know.
If simplicity isn’t quite right, then consider the complex 401(k) alternative. 401(k) plans permit higher levels of salary deferrals, so your underlings will appreciate your attention to their futures. Don’t forget, as a business owner you are an employee too, so 401(k) plans are often a great way to maximize your personal retirement savings. These plans do require more maintenance, and must adhere to strict ERISA rules and annual testing for compliance. Employees may make annual contributions up to $19,000 ($25,000 if 50+) in 2019 and employer and employee together can contribute up to 100% of compensation (or $56,000 in 2019). Unlike SEP and SIMPLE plans, 401(k) employer contributions may vest over time and are not immediately available, serving as additional incentive for employees to stay with the company.
Profit-sharing plans are fairly straightforward—sharing your company’s earnings with your employees—but are rather complicated in their execution. Your contribution is discretionary, and here you are holding the power of how much you wish to contribute to your employees’ retirements, though they can contribute as much as you decide in the plan’s terms. Like 401(k) plans, you may contribute up to $19,000 annually ($25,000 if 50+), and again like 401(k) plans, a financial institution is needed to help set up these profit-sharing plans. Because timing of payments is entirely up to the employer, these plans are especially valuable during down years when the income statement doesn’t need another red line.
The crowd-favorite among employees for years, Defined benefit plans are your father’s retirement plan. The important thing to remember is that these plans allow a fixed, pre-established benefit for employees, and a higher tax-deductible contribution for older employees. This is the pension system, and it has largely been replaced by the defined contribution model of today’s employers. The maximum contribution varies, and the maximum annual benefit at retirement is the lesser of $225,000 or 100% of final average pay for 2019. Consult a financial institution or employee benefit advisor for help with these plans.
One thing all these plans share is that early withdrawals are subject to penalty, so like in the kitchen, be patient: a watched pot never boils. OK, perhaps that metaphor is a stretch, but the point is help yourself by helping your employees: take the time to give them the right retirement plan and they will take the time to help your business grow.