Retirement Plans for Small Businesses

If you’re self-employed or own a small business and you haven’t established a retirement savings plan, what are you waiting for? A retirement plan can help you and your employees save for the future. And you’ll be in good company–over 1 million small businesses with 100 or fewer employees currently offer workplace retirement savings plans.

Tax advantages

A retirement plan can have significant tax advantages:

• Your contributions are deductible when made

• Your contributions aren’t taxed to an employee until distributed from the plan

• Money in the retirement program grows tax deferred (or, in the case of Roth accounts,

potentially tax free)

Types of plans

Retirement plans are usually either IRA-based (like SEPs and SIMPLE IRAs) or “qualified” (like 401(k)s,

profit-sharing plans, and defined benefit plans). Qualified plans are generally more complicated and

expensive to maintain than IRA-based plans because they have to comply with specific Internal Revenue

Code and ERISA (the Employee Retirement Income Security Act of 1974) requirements in order to qualify

for their tax benefits. Also, qualified plan assets must be held either in trust or by an insurance company.

With IRA-based plans, your employees own (i.e., “vest” in) your contributions immediately. With

qualified plans, you can generally require that your employees work a certain numbers of years before

they vest.

Which plan is right for you?

With a dizzying array of retirement plans to choose from, each with unique advantages and

disadvantages, you’ll need to clearly define your goals before attempting to choose a plan. For example, do you want:

• To maximize the amount you can save for your own retirement?

• A plan funded by employer contributions? By employee contributions? Both?

• A plan that allows you and your employees to make pretax and/or Roth contributions?

• The flexibility to skip employer contributions in some years?

• A plan with lowest costs? Easiest administration? The answers to these questions can help guide you

and your retirement professional to the plan (or combination of plans) most appropriate for you.

SEPs

A SEP allows you to set up an IRA (a “SEP-IRA”) for yourself and each of your eligible employees. You

contribute a uniform percentage of pay for each employee, although you don’t have to make

contributions every year, offering you some flexibility when business conditions vary. For 2012, your

contributions for each employee are limited to the lesser of 25% of pay or $50,000. Most employers,

including those who are self-employed, can establish a SEP. SEPs have low start-up and operating costs and can be established using an easy two-page form. The plan must cover any employee aged 21 or older who has worked for you for three of the last five years and who earns $550 or more.

SIMPLE IRA plan

The SIMPLE IRA plan is available if you have 100 or fewer employees. Employees can elect to make

pretax contributions in 2012 of up to $11,500 ($14,000 if age 50 or older). You must either match

your employees’ contributions dollar for dollar–up to 3% of each employee’s compensation–or make a

fixed contribution of 2% of compensation for each eligible employee. (The 3% match can be reduced to

1% in any two of five years.) Each employee who earned $5,000 or more in any two prior years, andwho is expected to earn at least $5,000 in the current year, must be allowed to participate in the plan.

SIMPLE IRA plans are easy to set up. You fill out a short form to establish a plan and ensure that

SIMPLE IRAs are set up for each employee. A financial institution can do much of the paperwork.

Additionally, administrative costs are low.

Profit-sharing plan

Typically, only you, not your employees, contribute to a qualified profit-sharing plan. Your contributions are discretionary–there’s usually no set amount you need to contribute each year, and you have the flexibility to contribute nothing at all in a given year if you so choose (although your contributions must be

nondiscriminatory, and “substantial and recurring,” for your plan to remain qualified). The plan must contain a formula for determining how your contributions are allocated among plan participants. A separate account is established for each participant that holds your contributions and any investment gains or losses. Generally, each employee with a year of service is eligible to participate (although you can require two years of service if your contributions are immediately vested). Contributions for any employee in 2012 can’t exceed the lesser of $50,000 or 100% of the employee’s compensation.

401(k) plan

The 401(k) plan (technically, a qualified profit-sharing plan with a cash or deferred feature) has become a

hugely popular retirement savings vehicle for small businesses. According to the Department of Labor, an

estimated 60 million American workers are enrolled in 401(k) plans with total assets of about 3 trillion

dollars. With a 401(k) plan, employees can make pretax and/or Roth contributions in 2012 of up to

$17,000 of pay ($22,500 if age 50 or older). These deferrals go into a separate account for each

employee and aren’t taxed until distributed. Generally, each employee with a year of service must be

allowed to contribute to the plan. You can also make employer contributions to your 401(k) plan–either matching contributions or discretionary profit-sharing contributions. Combined employer and employee contributions for any employee in 2012 can’t exceed the lesser of $50,000 (plus catch-up contributions of up to $5,500 if your employee is age 50 or older) or 100% of the employee’s compensation. In general, each employee with a year of service is eligible to receive employer contributions, but you can require two years of service if your contributions are immediately vested. 401(k) plans are required to perform somewhat complicated testing each year to make sure benefits aren’t disproportionately weighted toward higher paid employees. However, you don’t have to perform discrimination testing if you adopt a “safe harbor” 401(k) plan. With a safe harbor 401(k) plan, you generally have to either match your employees’ contributions (100% of employee deferrals up to 3% of compensation, and 50% of deferrals between 3 and 5% of compensation), or make a fixed contribution of 3% of compensation for all eligible employees, regardless of whether they contribute to the plan. Your contributions must be fully vested. Another way to avoid discrimination testing is by adopting a SIMPLE 401(k) plan. These plans are similar to SIMPLE IRAs, but can also allow loans and Roth contributions. Because they’re still qualified plans (and therefore more complicated than SIMPLE IRAs), and allow less deferrals than traditional 401(k)s, SIMPLE 401(k)s haven’t become popular.

Defined benefit plan

A defined benefit plan is a qualified retirement plan that guarantees your employees a specified level of

benefits at retirement (for example, an annual benefit equal to 30% of final average pay). As the name

suggests, it’s the retirement benefit that’s defined, not the level of contributions to the plan. In 2012, a

defined benefit plan can provide an annual benefit of up to $200,000 (or 100% of pay if less). The services of an actuary are generally needed to determine the annual contributions that you must make to the plan to fund the promised benefit. Your contributions may vary from year to year, depending on the performance of plan investments and other factors. In general, defined benefit plans are too costly and too complex for most small businesses. However, because they can provide the largest benefit of any retirement plan, and therefore allow the largest deductible employer contribution, defined benefit plans can be attractive to businesses that have a small group of highly compensated owners who are seeking to contribute as much money as possible on a tax-deferred basis. As an employer, you have an important role to play in helping America’s workers save. Now is the time to look into retirement plan programs for you and your employees.

Kenneth Himmler, Sr. is a Wealth Management Coach that focuses his efforts on working with individuals that value a higher quality of life above anything else.  This allows him to work primarily with people that have similar values and goals, which makes for a very mutually satisfying and long-lasting relationship.

Ken offers a wide range of programs and services – from financial planning to ongoing wealth management.  Ken specializes in coaching individuals, from retirees to entrepreneurs, and helping them to strive to obtain financial freedom and security.  He acts as the quarterback giving his clients access to work with top attorneys, CPA’s, and money managers, putting together a plan that enables people to go from their accumulation stage to the distribution phase, better known as retirement.  This allows many of his clients to strive to live an even higher quality of life into retirement than they had prior to retirement.

Along with being the CEO of IAM Wealth Management, Ken was the radio host of a live, syndicated program called, Live Rich & Stay Wealthy for ten years. He has also authored the financial column in four newspapers. In addition he also teaches financial courses at several colleges.  He has been a professional public speaker now for over seventeen years, traveling nationally for very select organizations and institutions.

for more info, please visit: www.iamllc.biz

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