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SMALL AND MICRO BUSINESS
PENSION PLANS
Sponsoring a retirement
plan can be simple.
There are several
pension plans specifically established for business with 1 to 100 employees.
The newest one we’ll refer to as a K-1. It is the one which operates
like a single employer/employee 401k. It is ideal for any business in which the
only employee is the owner with a spouse also involved in the operation of the
firm. A doctor’s or attorney’s office is a prime example of a business which is
a candidate for such a plan.
The SIMPLE* is
another relatively new type of pension plan for a small business. It too is
like a 401k plan, but is less expensive than the normal 401k or the K-1
mentioned above. The SIMPLE has annual limits on how much can be contributed by
the employee each month or pay period. These limits are indexed so they can be
higher in later years. As of now they are $10,000 total for the year. There is
also the feature of an employer’s match which can increase the amount
contributed into the pension plan. The SIMPLE has some other cost effective
features.
It does not require:
1.
a lot of paper work,
2.
time to administer,
3.
a third party administer as does the “K-1” or
401k, and
4.
fiduciary responsibility on the part of the
employer.
The SEP IRA**
is one of the older pension plans for a small business. It is not an employee
contribution plan. The employer makes the contribution. The amount of the
contribution is tied to a percentage of the business’s net income. Therefore,
the amount contributed can be well above the amount allowed in a SIMPLE plan.
You can have the SEP set up as Profit Sharing Plan or a Money Purchase Plan or a
combination of both.
The 401k plan is also
available for small business. These plans are for small to large companies who
want to offer a salary deferral plan with a maximum of options available. These
typically must include all employees and the contributions are made by the
employees. Quite often there is an employer match.
|
|
Suitability |
Features |
Eligibility |
Contribution Limits |
Distributions |
Deadlines |
|
K-1 |
One person co. with
high earnings |
|
|
|
|
|
|
SIMPLE |
Companies with 100
or fewer employees
Self –employed
individuals with modest incomes |
Easy admin. & low
cost
Tax deferred growth
Contributions lower
taxes
100% vesting
No testing for
“nondiscrimination” nor participation
|
Must include
employees who earn >$5,000/yr in two preceding years, and who can
expect to earn the same in the current year.
May exclude Union
employees. |
$7,000 deferral
limit.
Employer must match
deferrals dollar for dollar up to 3% of compensation OR make 2% contribution
for each eligible employee. |
Unless rolled over
within 60 days, distributions taken prior to age 59.5 may be subject to a
10% federal tax penalty. |
New plans must be
established between Jan 1-Oct 1.
60 day notice must
be given to eligible employees. |
|
SEP-IRA |
Self-employed or
small co. owner with variable earnings |
Easy to establish
Low cost
Min. paperwork & IRS
filings |
Must include
employees who
are over 21 and have
earned at least $450 in three of the preceding five yrs. |
Up to 25% of total
payroll (and not more than $40,000 per participant). |
Unless rolled over
within 60 days, distributions taken prior to age 59.5 may be subject to a
10% federal tax penalty. |
Employers
tax-filling deadline plus extensions, for prior year deductibility. |
|
401 K |
Small-large co.
wants max. options |
Salary deferral
reduces income tax
Primarily employee
funded
May include employer
contributions/match
Flexibility in plan
design
May allow loans
|
Must include
employees who are over 21 and have completed 1 yr. of service (must have
worked >1,000 hrs. each year). |
-$11,000 deferral
limit
-Max employer
deduction is 25% of total eligible payroll.
-Not to exceed
$40,000 per participant. |
Distribution events:
-Attainment of
plan’s normal retirement age
-Financial hardship
-Permanent Stability
-Plan termination
-Separation from
service
-Death |
Plan must be adopted
by employer’s year end.
Employer
contributions must be made by the employer’s tax filing deadline, plus
extensions. |
The above mentioned
plans are all considered “Defined Contribution Plans”. Contribution meaning you
know how much money you put into the plan. They are less costly than the
older/traditional “Defined Benefit Plans”. However, the benefit plans still
have their place in certain situations, such as a closely held of family owned
business. Clearly, the recent financial crisis which savaged many people’s
contribution plans, emphasized the value of a pension plan with a guaranteed
annuity pay out.
-
*SIMPLE stands for Savings Incentive
Match Plan for Employees.
-
** SEP stands for Simplifies Employee
Pension.
Pension Plans
Health Savings Accounts
Wealth Transfer
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