Retirement Savings Plans for Small Businesses
In this episode of “The Bottom Line,” EisnerAmper Private Business Services manager Tim Schuster talks about the benefits of a retirement savings plan for companies. Tim looks at SEP IRAs, SIMPLE IRAs, and Solo 401(k) plans and tells us about the eligibility and contribution limits for each.
Dave Plaskow: Hello and welcome to The Bottom Line. This podcast examines the everyday business and finance issues faced by closely held and private businesses. We hope to provide you with news you can use in what we like to think of as a jargon-free zone. I’m your host Dave Plaskow and with us again is Tim Schuster, a manager in EisnerAmper’s Private Business Services Group. In this episode we’ll discuss the different types of retirement savings plans available to small business owners. Tim, nice to see you.
Tim Schuster: Dave, it’s always a pleasure.
DP: Before we delve into the different types of plans, why is it important for small business owners to make retirement plans available to employees?
TS: Absolutely. A scary thought really is that retirement plans are actually going to be the main vehicle for people to save for retirement. You can’t fully rely on Social Security, nor would I put all of my eggs into Social Security. Really, another good thing, too, that a business can utilize this for is a really good way to recruit employees. It really is a great way to keep valuable employees. And, also, business owners, honestly, can benefit from it because it’s tax deductible.
DP: Sure.
TS: Absolutely.
DP: So what are the best plans suited to small businesses?
TS: Basically, there are three plans. One is the Simple Employment Pension plan, or SEP IRA. Another is the Savings Incentive Match Plan for Employees, or SIMPLE IRA. Self- Employed 401(k) plans, and also there’s a 403(b) plan for nonprofits, but we can save that one for another day.
DP: Okay. So with the other three, can you break each of those down for our listeners?
TS: Sure. Every plan has a variety of facets, but for our purposes today we’re going to really examine two, which is eligibility and contribution limits.
DP: Yep.
TS: So with the SEP IRAs, employees must participate if they have a minimum age – typically it’s 21 – and also a length of employment, and what I tend to see with my clients is anywhere between, say, three of the last five years.
DP: Okay.
TS: And also they have to have a salary of roughly $600 which is also, ironically enough, similar to the miscellaneous income amounts that 1099s would have to be issued.
DP: Sure.
TS: So, an employer’s total contribution is limited to the lesser of either, say, 25% of the employee’s wages or roughly $55,000.
DP: And the Simple IRA?
TS: So a Simple IRA is a savings incentive match plan for employee’s individual retirement plan accounts. It’s available to employers with 100 employees or less, and the employer may match the contributions of employees up to roughly 3% of an employee’s compensation. Or the employer might contribute a flat 2% of compensation for each employee, with at least $5,000 in compensation for the year. The employee contribution limit is $12,500.
DP: And finally, the Solo 401(K) plan.
TS: This plan is designed for sole proprietors with no full-time employees other than the business owner and spouse. The elective contribution limit is $18,000 of pre-tax income. In addition, you can make a non-elective profit-sharing contribution of up to 25% of pay. The maximum total contribution is roughly $53,000, so if you want to contribute a larger amount you may want to consider this over a SEP IRA.
Before we recorded this podcast today, I read this interesting fact that might have some potential big impacts under tax reform. So, most 401(k) plans and similar defined contribution benefits are offered by large employers because they’re too expensive for small businesses to administer. Under tax reform, it may become less – even less advantageous for small businesses to host these accounts. The bill reduces the income tax rates for small businesses, but does not address offering or contributing to retirement plans.
DP: So that’s just another tentacle of tax reform that’s reaching out there. This is really touching on a lot of different areas for people.
TS: Absolutely. The onion keeps on peeling.
DP: So Tim, it’s about that time for one of your always illuminating New Jersey Historical Society fun facts.
TS: Absolutely. So everyone loves going down the shore, but I don’t know if people are aware, the longest boardwalk is actually in New Jersey. Can you guess where?
DP: I’m going to say Wildwood.
TS: Wildwood is close. You’re in the right vicinity. But actually, it’s Atlantic City.
DP: Ah.
TS: So Atlantic City is the world’s longest boardwalk. So if you go down there, congratulations guys. You are a part of some sort of historical fact there.
DP: Nice. Well, thanks for all this great information Tim – it’s valuable as always.
TS: My pleasure.
DP: And thank you for listening to The Bottom Line as part of the EisnerAmper podcast series. If you have any questions or there’s a topic you’d like us to cover, email us at contact@EisnerAmper.com and visit EisnerAmper.com for more information on this and a host of other topics. And join us for our next EisnerAmper podcast when we get down to business.
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