Now is a great time of year to review your company’s benefits package. The competition for top talent is fierce and one way to retain your top employees is incorporating a retirement plan into your benefits package.
The good news…You still have time to implement a retirement plan for 2014.
The better news… you can deduct your contributions in 2014 while deferring the actual contributions to 2015!
There are many factors in determining if you are in a position to offer a retirement, including:
- Whether you are a sole proprietor or have employees
- The number of employees in your company
- Your level of profitability
- The amount of resources you have to help administer the plan
We’ve narrowed this down to three simple questions that we ask when advising our clients.
The First Question: Why Should You Offer a Retirement Plan?
Experts estimate that Americans will need up to 90 percent of their pre-retirement income to maintain their current standard of living when they stop working. As an employer, you have an important role in helping America’s workers save. By starting a retirement savings plan, you will help your employees save for the future. In addition to helping you attract and retain qualified employees, they also offer tax savings to your business. You will help secure your own retirement as well.
The Second Question: Do Retirement Plans offer Tax Advantages?
A retirement plan has significant tax advantages:
- Employer contributions are deductible from the employer’s income
- A tax credit for small employers that enables them to claim a credit for part of the ordinary and necessary costs of starting a SEP, SIMPLE, or certain other types of plans. The credit equals 50 percent of the cost to set up and administer the plan, up to a maximum of $500 per year for each of the first 3 years of the plan
The Final Question: What are the Options and Which one is right for Your Business?
There are many options for retirement plans, even if you are self-employed. Retirement plan features vary, but most fall under the following types:
1. Profit Sharing Plans and 401(k) plans:
Contributions to the plan are defined and the benefit to be provided at retirement is dependent on the contributions and earnings. In a pure profit sharing plan, only the employer makes contributions.
401(k) plans, on the other hand, provide for employee contributions as well. Two types of 401(k) plans gaining popularity are “Safe Harbor” 401(k) plans and “Automatic Deferral” 401(k) plans. In A “Safe Harbor” 401(k) plan, the employer makes a mandatory contribution on behalf of eligible participants, often as little as 3% of compensation, and in exchange, highly compensated employees can defer maximum amounts without having to do discrimination testing. Under an “Automatic Deferral” 401(k) plan employees automatically have a specific percentage contributed to the plan from their compensation unless they elect to not participate or elect a different percentage. The limit on employee elective deferrals to 401(k) plan is $17,500 in 2014. These plans are extremely popular with our clients, especially the Safe Harbor option.
You are required to file a Form 5500 tax return annually and administrative costs will vary by plan. Generally, you have until December 31, 2014 to set up these types of plans, however, “Safe Harbor” 401k plans need to be setup 90 days prior to year end or by September 30th for a calendar year plan.
2. SIMPLE Plans:
SIMPLE Plans are available to employers with 100 or fewer employees. These plans offer a lesser deferral limit, $12,000 for 2014, and matching contributions are at a fixed formula equal to either (1) 100% of the first 3% in deferrals or (2) 2% to all eligible participants who earned at least $5,000 regardless of if they contributed deferrals.
SIMPLE plans must be setup no later than 60 days prior to year end or by October 31st for a calendar year plan. SIMPLE Plans do not have any tax return filing requirements, do not require a plan document and are pretty inexpensive to administer. As the name implies, they are very simple!!
3. Defined benefit plans:
Under a defined benefit plan, the benefit provided at retirement is defined and contributions are determined by an actuary to provide adequate funding to furnish the
benefits. Defined benefit plans offer higher contribution limits – but be careful as the contributions are mandatory once the benefits are determined. These plans are required to file a Form 5500 tax return annually and generally incur high administrative costs. Remember, you have until December 31st to set up this type of plan.
We have been advising our clients in these plans for many years and can assist you in choosing the right one not just for your employees, but for yourself! If you would like to more information on choosing the right plan, please either visit http://www.irs.gov/Retirement-Plans/ or contact us at 216-524-8900.