In this article, you’ll learn about different types of Retirement Plans:
Many people have already accumulated some amount of retirement savings through current or previous employers, so your employees likely have started saving a nest egg for their retirement.
As an employer, you can choose from several different offerings to help your employees continue their retirement savings. Small businesses have access to many of the tools larger companies do, with some special options specially geared toward small businesses. Let’s take a look at the various retirement plan options.
Savings Incentive Match Plan for Employees (SIMPLE) Individual Retirement Account (IRA) plans are designed for employers that don’t presently offer any type of retirement savings vehicles to employees.
These plans can be set up through many mutual fund companies such as Vanguard (vanguard.com), Fidelity (fidelity.com), and T. Rowe Price (troweprice.com). There’s usually a low fee structure for both employers and employees.
With SIMPLE IRAs, employees can direct a portion of each paycheck into a tax-deferred retirement savings account, and employers are required to match up to 3 percent of an employee’s compensation.
Businesses with up to 100 employees are eligible to establish SIMPLE IRA plans. The amounts employees can contribute each year are indexed for inflation, but as of the 2016 tax year, the contribution limit is up to $12,500 per employee. Employees 50 or over can contribute an additional $3,000 as of the 2016 tax year.
One caveat of SIMPLE plans is that employers must match employee contributions on a dollar-for-dollar basis up to as much as 3 percent of the employee’s compensation.
Let’s say an employee earns $50,000 per year and contributes $5,000 toward his SIMPLE IRA. The employer is required to contribute the lesser of 3 percent of $50,000 or the employee’s contribution. In this case, 3 percent of $50,000 is $1,500, so the employer is required to contribute at least $1,500. Any employer contributions to a SIMPLE IRA plan are immediately vested.
In terms of retirement plans, vested means the contributions made on an employee’s behalf by an employer are permanent and cannot be taken away.
Simple Employee Pensions (SEPs)
This type of retirement plan gives small business owners more latitude on contributions. The maximum annual contribution is the lesser of 25 percent of compensation or $53,000 per year as of the 2016 tax year.
Employers can decide on a yearly basis how much to contribute. The catch is that each employee gets the same percentage match. Owners can’t elect to contribute 25 percent of their own compensation, for instance, without also contributing 25 percent of each employee’s compensation as well. This type of plan might be best suited to self-employed individuals with no employees.
You likely have some amount of savings already in a 401(k) plan. 401(k) plans share some similarities with SIMPLE IRA plans in that employees can make tax-deferred investments. However, 401(k) plans cost employers more to administer and require that Form 5500 be filed with the U.S. Department of Labor annually.
Employee participants can contribute up to $18,000 for the 2016 tax year, and employees age 50 or older can contribute an additional $6,000 per year.
Employers have discretion with regard to determining matching contributions for 401(k) plans, but they must follow the rules written into the plan. For 2015, a limit of $53,000 can be contributed to 401(k) plans, combining both the employee and the employer contribution. As with SIMPLE IRA plans, employer matching contributions vest upon deposit into an employee’s account.
Solo 401 (k)
There’s a special 401(k) provision called solo 401(k) or the one-participant 401(k) for businesses with no employees or businesses in which the only employee is the owner. The contribution limits are the same as for regular 401(k)s, but because the business owner is both the employer and the employee, the company can create a matching program and take advantage of both employer and employee contribution limits.
Historically, one of the main types of retirement plans for self-employed was the Keogh plan. Over time, these plans have fallen into disuse in favor of the easier-to-administer SIMPLE IRA and SEP plans discussed earlier.
Remitting Retirement Contributions
Employee retirement contributions are withdrawn from employee paychecks in the same fashion as an employee’s payroll taxes. However, instead of remitting funds to a government agency, you send the funds to the financial institution that administers your retirement plan.
Your business has a fiduciary responsibility to ensure the contributions are remitted timely. Delayed contributions can have serious ramifications, including the following:
- Employees miss out on potential investment income and gains during the delay.
- Civil or criminal penalties can apply to businesses that misuse employee retirement contributions.
Fiduciaries are individuals or entities entrusted with a legal or financial responsibility on another’s behalf.
Every retirement plan falls under the jurisdiction of the Employee Retirement Income Security Act (ERISA). This law, enacted in 1974, is administered by the U.S. Department of Labor (DOL). You might have noticed earlier that Form 5500 is filed with the DOL instead of the Internal Revenue Service (IRS). ERISA sets forth specific requirements for the fiduciary responsibilities of employers as well as the reporting requirements for employers and financial institutions.
It’s not uncommon for an employee to over contribute to a retirement plan. It’s not the employer’s responsibility to oversee how much an employee contributes; however, it’s helpful if the employer ensures employees are aware of the plan contribution limits.
If an employee contributes more than the statutory limit in a given year, he or she needs to contact the custodian of the plan—typically the financial institution or brokerage house that maintains it—and make a request to withdraw the excess.
There are tax penalties associated with contributing too much, so contributions should be made and carefully tracked throughout the year. You have until April 15 of the following year (the individual tax return filing date) to arrange for the refund without penalty.