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Discover the benefits of saving solo with a one-person 401(k)

In uncertain economic times, it is important to make smart business decisions. While your first inclination might be to focus on profits and losses, maintaining an experienced staff can be key to your company's success. Selecting the right retirement plan for them can foster loyalty and happiness among your valued employees. And it could mean substantial tax advantages for your company, as well.

However, picking a plan that’s right for your budget and for your employees’ futures isn’t always easy. With several viable options available, it’s easy to become overwhelmed with the responsibility of selecting the appropriate one.

First, you must decide what type of plan to offer. Two general categories exist today – defined contribution and defined benefit. As the name implies, the former outlines the contributions your company will make each year, based on a percentage of your employees’ compensation. If you want to define the actual benefits your employees will receive at retirement – such as a fixed monthly payment or a certain percentage of compensation – you should consider a defined benefit plan instead.

While many options are available for your company, a few are outlined below.

Simplified Employee Pension (SEP) plans
SEP plans are ideal for small businesses seeking to minimize filings, paperwork and overall cost. With minimal IRS reporting and disclosure requirements, this account allows your company to deposit contributions into the IRA of each participating and eligible employee. Funded on a discretionary basis, contribution limits include the lesser of 25% of an individual employee’s compensation or $40,000. Easy to set up and administer, your company is not required to file annual plan returns. You can establish a SEP until your tax-filing deadline – plus extensions.

Simple IRA
Simple IRAs are appropriate for companies with 100 or fewer employees who are looking for a plan that allows employee elective salary deferral contributions with minimal cost.

Similar to a 401(k) plan but without the administrative cost, a Simple IRA allows your employees to defer a portion of their salary towards retirement. Your company must make a contribution, either matching the employee contribution dollar-for-dollar on the first 3% of the elective deferral or by making a 2% uniform contribution to all eligible employees, regardless of whether they make an elective deferral. This plan must be in place by October 1 of the calendar year and cannot be combined with any other retirement alternatives.

Profit sharing plans
Establish a profit sharing plan if you want to offer flexible, discretionary contributions combined with the ability to impose a vesting schedule on the funds.

These flexible plans allow you to determine contributions based on company profit. If your company has a down year, contributions aren't required. However, you can reward your employees with a high contribution when business picks up. Your company's maximum deduction is limited to 25% of the annual compensation paid to eligible employees. Individual contribution limits for employees are the lesser of 100% of compensation or $40,000. You must set up this plan by December 31 or by the end of your company's tax year. You'll have to file IRS Form 5500, which the government will automatically send to you.

401(k) plans
Consider a 401(k) plan if your company has more than 25 employees who wish to participate in a retirement plan.

With this plan, your company can make matching contributions that are tied to elective employee salary deferrals. Regardless of those deferral amounts, your company is responsible for contributing up to 25% of your total eligible payroll. Individuals are limited to contributions of up to 100% of their compensation or $40,000. As with profit sharing plans, you must have this alternative in place by December 31 or by the end of your company's tax year. IRS Form 5500 must be filed, but plan costs can be shifted from your company to your employees.

Defined benefit pension plans
If you want to offer a fixed benefit that favors older employees, consider this plan. It is also ideal for a small business owner at least 45 years old who has never sponsored any other type of retirement plan or for an owner wishing to provide a fixed benefit to her employees.

Designed to provide a specific benefit amount at retirement, this traditional pension plan gives your company the opportunity to contribute annual funds based on factors such as age, salary level and years of service. Each year, your plan actuary will determine the required annual contribution using the factors indicated above. Based on interest rate assumptions, the maximum annual benefit to each employee will be the lessor of that determination and 100% of the participant's compensation up to $160,000. Contributions are mandatory and the plan must be set up by December 31 or by the end of your company's tax year. IRS Form 5500 must be filed.

Not all available alternatives are mentioned here, but this article is a starting point for gathering the information you need to make the best decision for your company. Please contact me to discuss your retirement plan options.