CHOOSING A RETIREMENT SOLUTION FOR YOUR SMALL BUSINESS
| CHOOSING A RETIREMENT SOLUTION FOR YOUR SMALL BUSINESS |
| Choosing a Retirement Solution for Your Small Business is a joint project of the U.S. Department of Labor’s Employee Benefits Security Administration (EBSA) and the Internal Revenue Service. To view this and other EBSA publications, visit the agency’s website. To order publications or speak with a benefits advisor, contact EBSA electronically. Or call toll free: 866–444–3272 This material will be made available in alternative format to persons with disabilities upon request: Voice phone: (202) 693–8664 TTY: (202) 501–3911 This booklet constitutes a small entity compliance guide for purposes of the Small Business Regulatory Enforcement Fairness Act of 1996. It does not constitute legal, accounting, or other professional advice. |
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Starting a retirement savings plan can be easier amount of the credit is based on the contributions
than most business owners think. What’s more, participants make and their credit rate. The
there are many retirement programs that provide maximum contribution eligible for the credit
tax advantages to both employers and employees. is $2,000. The credit rate can be as low as 10
percent or as high as 50 percent, depending on the
Why Save? participant’s adjusted gross income; and
Experts estimate that Americans will need 70 to 90 A Roth program that can be added to a 401(k) plan
percent of their preretirement income to maintain their to allow participants to make after-tax contributions
current standard of living when they stop working. Now into separate accounts, providing an additional way
is the time for you and your employees to start planning to save for retirement. Distributions upon death
for retirement. As an employer, you have an important or disability or after age 59 1/2from Roth accounts
role in helping America’s workers save. held for 5 years, including earnings, are generally
tax-free.
By starting a retirement savings plan, you will help your
employees save for their future. Retirement plans may A Few Retirement Facts
also help you attract and retain qualified employees, and Most private-sector retirement vehicles are either
they offer tax savings to your business. You will help Individual Retirement Arrangements (IRAs), defined
secure your own retirement as well. You can establish a contribution plans, or defined benefit plans.
plan even if you are self-employed.
People tend to think of an IRA as something that
Any Tax Advantages? individuals establish on their own, but an employer
A retirement plan has significant tax advantages: can help its employees set up and fund their IRAs.
With an IRA, the amount that an individual receives at
Employer contributions are deductible from the retirement depends on the funding of the IRA and the
employer’s income, earnings (or losses) on those funds.
Employee contributions (other than Roth
contributions) are not taxed until distributed to the Defined contribution plans are employer-established
employee, plans that do not promise a specific benefit at
Money in the plan grows tax-free, and retirement. Instead, employees or their employer (or
Distributions may be eligible for tax-favored both) contribute to employees’ individual accounts
rollovers or transfers into other retirement programs. under the plan, sometimes at a set rate (such as 5
percent of salary annually). At retirement, an employee
receives the accumulated contributions plus earnings
Any Other Incentives?
(or minus losses) on the invested contributions.
It’s easy to establish a retirement plan that benefits
you, your business and your employees, and there are Defined benefit plans, on the other hand, promise a
additional incentives for having a plan: specified benefit at retirement, for example, $1,000
a month. The amount of the benefit is often based on
High contribution limits so you and your employees
a set percentage of pay multiplied by the number of
can set aside large amounts for retirement; years the employee worked for the employer offering
“Catch-up” rules that allow employees age 50 and
the plan. Employer contributions must be sufficient to
over to set aside additional contributions. The “catch fund promised benefits.
up” amount varies, depending on the type of plan;
A tax credit for small employers that enables them to Small businesses may choose to offer IRAs, defined
claim a credit for part of the ordinary and necessary contribution plans, or defined benefit plans. Many
costs of starting a SEP, SIMPLE, or certain other financial institutions and retirement plan practitioners
types of retirement plans (more on these later). The make available one or more of these retirement plans
credit equals 50 percent of the cost to set up and that have been pre-approved by the IRS.
administer the plan, up to a maximum of $500 per
year for each of the first 3 years of the plan; On the following two pages you will find a chart
A tax credit for certain low- and moderate-income outlining the advantages of each of the most popular
individuals (including self-employed) who make types of IRA-based and defined contribution plans and
contributions to their plans (“Saver’s Credit”). The an overview of a defined benefit plan.
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DEFINED BENEFIT
IRA-BASED PLANS DEFINED CONTRIBUTION PLANS
PLANS
Payroll SEP SIMPLE IRA Plan Profit Sharing Safe Harbor 401(k) Automatic Enrollment Traditional 401(k)
Deduction IRA 401(k)
Easy to set up and maintain. Easy to set up and maintain. Salary reduction plan with little Permits employer to make large Permits high level of salary deferrals Provides high level of participation and Permits high level of salary deferrals by Provides a fixed, pre-established
Key administrative paperwork. contributions for employees. by employees without annual permits high level of salary deferrals by employees. benefit for employees.
Advantage nondiscrimination testing. employees. Affords safe harbor relief for
default investments.
Any employer with one or more Any employer with one or Any employer with 100 or Any employer with one or more Any employer with one or more Any employer with one or more Any employer with one or more Any employer with one or more
Employer employees. more employees. fewer employees that does employees. employees. employees. employees. employees.
Eligibility not currently maintain another
retirement plan.
Arrange for employees to make May use IRS Form 5305- May use IRS Form 5304-SIMPLE No model form to establish this No model form to establish this plan. No model form to establish this plan. No model form to establish this plan. No model form to establish this plan.
Employer’s payroll deduction contributions. SEP to set up the plan. No or 5305-SIMPLE to set up plan. May need advice from a May need advice from a financial May need advice from a financial May need advice from a financial Advice from a financial institution
Role Transmit contributions for annual filing requirement for the plan. No annual filing financial institution or employee institution or employee benefit institution or employee benefit adviser. institution or employee benefit adviser. or employee benefit adviser would
employees to IRA. No annual employer. requirement for employer. Bank benefit adviser. Must file annual adviser. A minimum amount of May require annual nondiscrimination Requires annual nondiscrimination be necessary. Must file annual Form
filing requirement for employer. or financial institution handles Form 5500. employer contributions is required. testing to ensure that plan does not testing to ensure that plan does 5500. An actuary must determine
most of the paperwork. Must file annual Form 5500. discriminate in favor of highly not discriminate in favor of highly annual contributions.
compensated employees. Must file annual compensated employees. Must file annual
Form 5500. Form 5500.
Employee contributions remitted Employer contributions only. Employee salary reduction Annual employer contribution is Employee salary reduction Employee salary reduction contributions Employee salary reduction contributions Primarily funded by employer.
Contributors through payroll deduction. contributions and employer discretionary. contributions and employer and maybe employer contributions. and maybe employer contributions.
To The Plan contributions. contributions.
$6,000 for 2020 and for 2021. Up to 25% of compensation (1) Employee: $13,500 in 2020 Up to the lesser of 100% of Employee: $19,500 in 2020 and in Employee: $19,500 in 2020 and in 2021. Employee: Employee: $19,500 in 2020 Annually determined contribution.
Maximum Participants age 50 or over can but no more than $57,000 for and in 2021. Participants age compensation (1)or $57,000 for 2021. Participants age 50 or over can Participants age 50 or over can make and in 2021. Participants age 50 or over
Annual make additional contributions 2020 and $58,000 for 2021. 50 or over can make additional 2020 and $58,000 for 2021. make additional contributions up to additional contributions up to $6,500 in can make additional contributions up to
Contribution up to $1,000. contributions up to $3,000 in Employer can deduct amounts that $6,500 in 2020 and in 2021. 2020 and in 2021. $6,500 in 2020 and in 2021.
2020 and in 2021. do not exceed 25% of aggregate
(per
compensation for all participants. Employer/Employee Combined: Employer/Employee Combined: Up Employer/Employee Combined: Up
participant) Employer: Either match Up to the lesser of 100% of to the lesser of 100% of compensation (1) to the lesser of 100% of compensation (1)
employee contributions 100% of compensation (1)or $57,000 for 2020 or $57,000 for 2020 and $58,000 for or $57,000 for 2020 and $58,000 for
See the
IRS’s website first 3% of compensation (can and $58,000 for 2021. Employer 2021. Employer can deduct (1) amounts 2021. Employer can deduct (1) amounts
for annual updates be reduced to as low as 1% in can deduct (1) amounts that do that do not exceed 25% of aggregate that do not exceed 25% of aggregate
any 2 out of 5 yrs.); or contribute not exceed 25% of aggregate compensation for all participants and (2) compensation for all participants and (2)
2% of each eligible employee’s compensation for all participants and all salary reduction contributions. all salary reduction contributions.
compensation. 2 (2) all salary reduction contributions.
Employee can decide how much Employer can decide whether Employee can decide how much Employer makes contribution as Employee can decide how much Employees, unless they opt otherwise, Employee can decide how much to Employer generally required to make
Contributor’s to contribute at any time. to make contributions year-to- to contribute. Employer must set by plan terms. to contribute based on a salary must make salary reduction contributions contribute based on a salary reduction contribution as set by plan terms.
Options year. make matching contributions reduction agreement. The employer specified by the employer. The employer agreement. The employer can make
or contribute 2% of each must make either specified matching can make additional contributions, additional contributions, including
employee’s compensation. contributions or a 3% contribution to including matching contributions as set matching contributions as set by plan
all participants. by plan terms. terms.
There is no requirement. Can be Must be offered to all Must be offered to all employees Generally, must be offered to all Generally, must be offered to all Generally, must be offered to all Generally, must be offered to all Generally, must be offered to all
Minimum made available to any employee. employees who are at least 21 who have compensation of at employees at least 21 years old employees at least 21 years old who employees at least 21 years old who employees at least 21 years old who employees at least 21 years old who
Employee years old, employed by the least $5,000 in any prior 2 years, who worked at least 1,000 hours in worked at least 1,000 hours in a worked at least 1,000 hours in a previous worked at least 1,000 hours in a previous worked at least 1,000 hours in a
Coverage employer for 3 of the last 5 and are reasonably expected a previous year. previous year. year. year. previous year.
years and had compensation of to earn at least $5,000 in the
Requirements
$600 for 2020 and $650 for 2021. current year.
Withdrawals permitted anytime Withdrawals permitted anytime Withdrawals permitted anytime Withdrawals permitted after a Withdrawals permitted after a Withdrawals permitted after a specified Withdrawals permitted after a specified Payment of benefits after a
Withdrawals, subject to federal income taxes; subject to federal income taxes; subject to federal income taxes; specified event occurs (retirement, specified event occurs (retirement, event occurs (retirement, plan event occurs (retirement, plan specified event occurs (retirement,
Loans & early withdrawals subject to early withdrawals subject to early withdrawals subject to plan termination, etc.) subject plan termination, etc.) subject termination, etc.) subject to federal termination, etc.) subject to federal plan termination, etc.). Plan may
Payments an additional tax (special rules an additional tax. Participants an additional tax. Participants to federal income taxes. Plan to federal income taxes. Plan income taxes. Plan may permit loans and income taxes. Plan may permit loans and permit loans; early withdrawals
apply to Roth IRAs). Participant cannot take loans from their cannot take loans from their may permit loans and hardship may permit loans and hardship hardship withdrawals; early withdrawals hardship withdrawals; early withdrawals subject to an additional tax.
loans are not permitted. SEP–IRAs. SIMPLE IRAs. withdrawals; early withdrawals withdrawals; early withdrawals subject to an additional tax. subject to an additional tax.
subject to an additional tax. subject to an additional tax.
Contributions are immediately Contributions are immediately All contributions are May vest over time according to Employee salary reduction Employee salary reduction contributions Employee salary reduction contributions May vest over time according to plan
Vesting 100% vested. 100% vested. immediately 100% vested. plan terms. contributions and all safe harbor are immediately 100% vested. Employer are immediately 100% vested. Employer terms.
employer contributions are contributions may vest over time contributions may vest over time
immediately 100% vested. Some according to plan terms. according to plan terms.
employer contributions may vest over
time according to plan terms.
12 Maximum compensation on which contributions can be based is $285,000 for 2020 and $290,000 for 2021. Maximum compensation on which employer 2% contributions can be based is $285,000 for 2020 and $290,000 for 2021.
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Payroll Deduction IRAs SIMPLE IRA plans are easy to set up. You fill out a short
form to establish a plan and ensure that SIMPLE IRAs (to
Even if an employer doesn’t want to adopt a retirement
hold contributions made under the SIMPLE IRA plan) are
plan, the employer can allow its employees to contribute
established for each employee. A financial institution can
to an IRA through payroll deductions, providing a simple
do much of the paperwork. Additionally, administrative
and direct way for employees to save. In this type of
costs are low.
arrangement, the employee always makes the decisions
about whether, when, and how much to contribute to the
You may have your employees set up their own SIMPLE IRAs
IRA (up to $6,000 for 2020 and for 2021, and $7,000 for
at a financial institution of their choice or have all SIMPLE
2020 and for 2021 if age 50 or older, increasing thereafter).
IRAs maintained at one financial institution you choose.
Some individuals eligible to contribute to an IRA wait
Employees can decide how and where the money will be
until the end of the year to set aside the money and
invested, and keep their SIMPLE IRAs even when they
then find that they don’t have sufficient funds to do so.
change jobs.
Payroll deductions allow employees to plan ahead and
save smaller amounts each pay period. Payroll deduction
contributions are tax-deductible by the employee, to the Profit Sharing Plans
same extent as other IRA contributions. Employer contributions to a profit sharing plan can be
discretionary. Depending on the plan terms, there is often no
set amount that an employer needs to contribute each year.
Simplified Employee Pensions (SEPs)
A SEP plan allows employers to set up SEP IRAs for If you do make contributions, you will need to have
themselves and each of their employees. Employers a set formula for determining how the contributions
generally must contribute a uniform percentage of pay are allocated among plan participants. The funds are
for each employee, although they do not have to make accounted separately for each employee.
contributions every year. Employer contributions are
limited to the lesser of 25 percent of pay or $57,000 for Profit sharing plans can vary greatly in their complexity.
2020 and $58,000 for 2021. (Note: the dollar amount is Many financial institutions offer prototype profit sharing
indexed for inflation and may increase.) Most employers, plans that can reduce the administrative burden on
including those who are self-employed, can establish a SEP. individual employers.
SEPs have low start-up and operating costs and can be
401(k) Plans
established using a two-page form (Form 5305-SEP). And
401(k) plans have become a widely accepted retirement
you can decide how much to put into a SEP each year –
savings vehicle for small businesses. An estimated 58
offering you some flexibility when business conditions vary.
million U.S. workers participate in 401(k) plans that have
total assets of about $5.6 trillion.
SIMPLE IRA Plans
A SIMPLE IRA plan is a savings option for employers With a 401(k) plan, employees can choose to defer
with 100 or fewer employees. a portion of their salary. So instead of receiving that
amount in their paycheck today, the employees can
This plan allows employees to contribute a percentage contribute the amount into a 401(k) plan sponsored by
of their salary each paycheck and requires employer their employer. These deferrals are accounted separately
contributions. Under SIMPLE IRA plans, employees can for each employee. Deferrals are made on a pretax basis
set aside up to $13,500 in 2020 and in 2021 ($16,500 in but, if the plan allows, the employee can choose to make
2020 and in 2021 if age 50 or older) by payroll deduction them on an after-tax (Roth) basis. Many 401(k) plans
(subject to cost-of-living adjustments in later years). provide for employer matching or other contributions.
Employers must either match employee contributions The Federal Government and most state governments do
dollar for dollar – up to 3 percent of an employee’s not tax employer contributions and pretax deferrals (plus
compensation – or make a fixed contribution of 2 percent earnings) until distributed.
of compensation for all eligible employees, even if the
employees choose not to contribute. Like most profit sharing plans, 401(k) plans can vary
significantly in their complexity. However, many financial
If your plan provides for it, you can choose to institutions and other organizations offer IRS pre-approved
automatically enroll employees in SIMPLE IRA plans as 401(k) plans, which can greatly lessen the administrative
long as the employees are allowed to choose not to have burden of establishing and maintaining these plans.
salary reduction contributions made to their SIMPLE
IRAs or to have salary reduction contributions made in a
different amount.
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Safe Harbor 401(k) Plans may rise incrementally over the first few years, although
A safe harbor 401(k) plan is intended to encourage plan the employee can choose different amounts.
participation among rank-and-file employees and to
ease the administrative burden by eliminating the tests Association Retirement Plans
ordinarily applied under a traditional 401(k) plan. This In addition, you can join with other employers in your
plan is ideal for businesses with highly compensated geographic area or industry to offer a defined contribution
employees whose contributions would be limited in a retirement plan, such as a 401(k), to your employees.
traditional 401(k) plan. Certain working owners without other employees
(including sole proprietors) also can join. These
A safe harbor 401(k) plan allows employees to contribute a Association Retirement Plans (ARPs) help groups of
percentage of their salary each paycheck and requires employer small employers and working owners obtain economies
contributions. In a safe harbor 401(k) plan, the mandatory of scale for administrative costs and investment choices
employer contribution is always 100 percent vested. currently enjoyed by large businesses. The employer
group or association would act as plan administrator and
Automatic Enrollment 401(k) Plans would assume most of the responsibilities in operating the
Automatic enrollment 401(k) plans can increase plan plan, allowing you to keep more of your day-to-day focus
participation among rank-and-file employees and make on managing your business.
it more likely that the plan will pass the tests ordinarily
required under a traditional 401(k) plan. Some automatic Defined Benefit Plans
enrollment 401(k) plans are exempt from the testing. Some employers find that defined benefit plans offer
This type of plan is for employers who want a high level business advantages. For instance, businesses can
of participation, and who have highly compensated generally contribute (and therefore deduct) more each
employees whose contributions might be limited under a year than in defined contribution plans. In addition,
traditional 401(k) plan. employees often value the fixed benefit provided by this
type of plan and can often receive a greater benefit at
Employees are automatically enrolled in the plan and retirement than under any other type of retirement plan.
contributions are deducted from their paychecks, unless However, defined benefit plans are often more complex
they opt out of contributing after receiving notice from the and, likely, more expensive to establish and maintain than
plan. There are default employee contribution rates, which other types of plans.
To Find Out More… Also available from the U.S. Department of Labor:
DOL sponsors an interactive website – the Small
The following jointly developed publications are available Business Retirement Savings Advisor – that encourages
for small businesses on the DOL and IRS websites and small business owners to choose the
through DOL’s toll-free number listed below: appropriate retirement plan for their business and
401(k) Plans for Small Businesses
provides resources on maintaining plans.
(Publication 4222)
Automatic Enrollment 401(k) Plans for Small Publications for small businesses:
Businesses (Publication 4674) Meeting Your Fiduciary Responsibilities
Payroll Deduction IRAs for Small Businesses Understanding Retirement Plan Fees and Expenses
(Publication 4587) Selecting an Auditor for Your Employee Benefit Plan
Profit Sharing Plans for Small Businesses Selecting and Monitoring Pension Consultants – Tips for
(Publication 4806) Plan Fiduciaries
SEP Retirement Plans for Small Businesses Tips for Selecting and Monitoring Service Providers for
(Publication 4333) Your Employee Benefit Plan
SIMPLE IRA Plans for Small Businesses
(Publication 4334) Also available from the Internal Revenue Service:
Retirement Plans for Small Business (SEP, SIMPLE, and
For business owners with a plan: Qualified Plans) (Publication 560)
Adding Automatic Enrollment to Your 401(k) Contributions to Individual Retirement Arrangements
Plan (Publication 4721) (IRAs) (Publication 590-A)
Retirement Plan Correction Programs Distributions from Individual Retirement Arrangements
(Publication 4224) (IRAs) (Publication 590-B)
Designated Roth Accounts Under 401(k), 403(b), or
DOL website Governmental 457(b) Plans (Publication 4530)
Publications request number: 866-444-3272
IRS website
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EMPLOYEE BENEFITS SECURITY ADMINISTRATION
UNITED STATES DEPARTMENT OF LABOR
Publication 3998 (Rev. 11-2020) Catalog Number 34066S
Department of the Treasury Internal Revenue Service www.IRS.gov
November 2020
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