Potter & Company, P.A.
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Accounting, Tax and Consulting Solutions
Choosing a Retirement Plan for Your Business
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usiness owners primarily use retirement plans to reward employees, save income taxes, and accumulate retirement funds for themselves. Offering a retirement plan provides a competitive advantage and improves the ability to attract and retain employees. Retirement plans offer valuable tax deductions and allow investment earnings to grow tax-deferred. Many options are available and selecting the right plan for your business can be a confusing process. Simplifying your choices can help make the decision more clear. Retirement plans can be broken into two broad categories: IRA-based plans and qualified retirement plans. IRA-based plans are typically more suitable for businesses with a small number of employees. Qualified retirement plans are regulated by the Employee Retirement Income Security Act (ERISA) and are more complex, but offer benefits not available in IRA-based plans. A few of the more common retirement plan options are listed below.
Employer-Funded
IRA-Based
Qualified Retirement Plan
employer contributions. Also, under a qualified plan, business owners are often able to contribute more for themselves than would be available under an IRA-based plan. Two categories of qualified retirement plans exist: defined benefit plans and defined contribution plans, and specific types of plans are allowed under these categories. The use of defined benefit plans has declined in recent years due to the complexity and cost required to maintain these plans. Defined contribution plans are generally less complex and less expensive to administer than defined benefit plans. The employer bears no risk for paying a specified benefit at retirement, rather, the amount of the contribution into the plan is defined each year. The ultimate benefit to be received at retirement is limited to the amount in the employee’s account. Commonly utilized defined contribution plans include profit sharing and 401(k) plans. Both of these types of retirement plans are available to any size business and allow a business to have other retirement plans—frequently a profit sharing plan is used in combination with a 401(k) plan.
SEP-IRA (Simplified Employee Pension Plan)
Defined Benefit Plan Profit Sharing Plan
Profit Sharing Plans
SIMPLE-IRA
Traditional 401(k) ROTH 401(k) feature
Employer AND Employee Funded
IRA-Based Plans IRA-based plans are relatively inexpensive to maintain and are easy to start and administer. A summary of the features of IRA-based retirement plans follows.
Employer Contributions
Discretionary
Discretionary
Employee Contributions
Not Allowed
Optional
Individual Accounts
maintained for each participant
maintained for each participant
Vesting
Employees vest in employer contribution
Employees vest in employer contribution
Annual Filing Requirements
Form 5500
Form 5500
The lesser of 25% of compensation or $49,000
Up to $49,000
SEP IRA
Simple IRA
Business Size
Any size – most frequently used by businesses with only a few employees
Any business with 100 or fewer employees
Contribution Limit for 2011
Employer Contributions
Discretionary – contribute equally for all eligible employees
Required minimum contributions
Employee Contribution Limit for 2011 (salary reduction contributions)
Employee Contributions
Not allowed
Optional
Vesting
Employee is always 100% vested in all SEP-IRA money
Employee is always 100% vested in all Simple-IRA money
Annual Filing Requirements
None
None
Contribution Limit for 2011
The lesser of 25% of compensation or $49,000
Up to $49,000
Employee Contribution Limit for 2011 (salary reduction contributions)
No employee contributions allowed
$11,500 $2,500 catch-up contributions for employees age 50 or older
Qualified Retirement Plans Qualified retirement plans provide options not available in IRA-based plans, and allow business owners choices in plan benefits. Commonly utilized choices allowed include participant loans and a vesting schedule for
c o n s t r u c t i ve c a t a ly s t fo r c re a t i ve c o n s c i o u s n e s s
401(k) Plans All Types
No employee contributions allowed
$16,500 $5,500 catch-up contributions for employees age 50 or older
Plan discrimination testing is required in defined contribution plans because contributions can not unfairly benefit the owner or highly compensated employees. The testing is performed to make sure contributions and /or deferrals are not too highly weighted to senior management. Deciding What is Best for You Knowing a little bit more about the types of retirement plans available should make choosing a retirement plan more clear. Basically you need to prioritize your goals and find the plan that best meets your needs. Qualified plans are highly regulated but offer features not available in IRA based plans. The retirement saving opportunities provided by qualified plans usually justify the cost and administrative expenses. There are many retirement plan choices available to you as a business owner, so after evaluating your retirement goals choose the plan that suits your retirement plan needs and objectives. Content contributed by Potter & Company, a locally based certified public accounting firm offering core services of professional accounting, business consulting, and financial analysis. For more information, contact Bucky Glover at 704-283-8189 or visit www.gotopotter.com.
september 2011
11