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. |
|
Starting a retirement savings plan can be easier A Roth program that can be added to a 401(k) plan
than most business owners think. What’s more, to allow participants to make after-tax contributions
there are many retirement programs that provide into separate accounts, providing an additional way
tax advantages to both employers and employees. to save for retirement. Distributions upon death or
disability or after age 59 1/2from Roth accounts held
Why Save? for 5 years, including earnings, are generally tax-
Experts estimate that Americans will need 70 to 90 free.
percent of their preretirement income to maintain their
current standard of living when they stop working. Now A Few Retirement Facts
is the time for you and your employees to start planning Most private-sector retirement vehicles are either
for retirement. As an employer, you have an important Individual Retirement Arrangements (IRAs), defined
role in helping America’s workers save. contribution plans, or defined benefit plans.
By starting a retirement savings plan, you will help your People tend to think of an IRA as something that
employees save for their future. Retirement plans may individuals establish on their own, but an employer
also help you attract and retain qualified employees, and can help its employees set up and fund their IRAs.
they offer tax savings to your business. You will help With an IRA, the amount that an individual receives at
secure your own retirement as well. You can establish a retirement depends on the funding of the IRA and the
plan even if you are self-employed. earnings (or losses) on those funds.
Any Tax Advantages? Defined contribution plans are employer-established
A retirement plan has significant tax advantages: plans that do not promise a specific benefit at
retirement. Instead, employees or their employer (or
Employer contributions are deductible from the both) contribute to employees’ individual accounts
employer’s income, under the plan, sometimes at a set rate (such as 5
Employee contributions (other than Roth percent of salary annually). At retirement, an employee
contributions) are not taxed until distributed to the receives the accumulated contributions plus earnings
employee, (or minus losses) on the invested contributions.
Money in the plan grows tax-free, and
Distributions may be eligible for tax-favored Defined benefit plans, on the other hand, promise a
rollovers or transfers into other retirement programs. specified benefit at retirement, for example, $1,000
a month. The amount of the benefit is often based on
a set percentage of pay multiplied by the number of
Any Other Incentives?
years the employee worked for the employer offering
It’s easy to establish a retirement plan that benefits
the plan. Employer contributions must be sufficient to
you, your business and your employees, and there are
fund promised benefits.
additional incentives for having a plan:
Small businesses may choose to offer IRAs, defined
High contribution limits so you and your employees
contribution plans, or defined benefit plans. Many
can set aside large amounts for retirement;
financial institutions and retirement plan practitioners
“Catch-up” rules that allow employees age 50 and
make available one or more of these retirement plans
over to set aside additional contributions. The “catch
that have been pre-approved by the IRS.
up” amount varies, depending on the type of plan;
A tax credit for small employers that enables them to
On the following two pages you will find a chart
claim a credit for part of the ordinary and necessary outlining the advantages of each of the most popular
costs of starting a SEP, SIMPLE, or certain other types of IRA-based and defined contribution plans
types of retirement plans (more on these later). The and an overview of a defined benefit plan. Note: In
credit equals 50 percent of the cost to set up and addition, you can join with other employers in your
administer the plan, up to a maximum of $500 per geographic area or your industry to offer a defined
year for each of the first 3 years of the plan; contribution retirement plan, such as a 401(k), to your
A tax credit for certain low- and moderate-income employees. These Association Retirement Plans (ARPs)
individuals (including self-employed) who make help groups of small employers and working owners
contributions to their plans (“Saver’s Credit”). The obtain economies of scale for administrative costs
amount of the credit is based on the contributions and investment choices currently enjoyed by large
participants make and their credit rate. The maximum businesses. For more information, visit DOL’s Website.
contribution eligible for the credit is $2,000. The
credit rate can be as low as 10 percent or as high as
50 percent, depending on the participant’s adjusted
gross income; and
|
|
IRA-BASED PLANS DEFINED CONTRIBUTION PLANS DEFINED BENEFIT
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 2019 and for 2020. Up to 25% of compensation 1 Employee: $13,000 in 2019 and Up to the lesser of 100% of Employee: $19,000 in 2019 and Employee: $19,000 in 2019 and $19,500 Employee: $19,000 in 2019 and $19,500 Annually determined contribution.
Maximum Participants age 50 or over can but no more than $56,000 for $13,500 in 2020. Participants compensation1or $56,000 for $19,500 in 2020. Participants age in 2020. Participants age 50 or over in 2020. Participants age 50 or over
Annual make additional contributions 2019 and $57,000 for 2020. age 50 or over can make 2019 and $57,000 for 2020. 50 or over can make additional can make additional contributions up to can make additional contributions up to
Contribution up to $1,000. additional contributions up to Employer can deduct amounts that contributions up to $6,000 in 2019 $6,000 in 2019 and $6,500 in 2020. $6,000 in 2019 and $6,500 in 2020.
$3,000 in 2019 and in 2020. do not exceed 25% of aggregate and $6,500 in 2020.
(per
compensation for all participants. Employer/Employee Combined: Up Employer/Employee Combined: Up to
participant) Employer: Either match Employer/Employee Combined: to the lesser of 100% of compensation1 the lesser of 100% of compensation1or
employee contributions 100% of Up to the lesser of 100% of or $56,000 for 2019 and $57,000 for $56,000 for 2019 and $57,000 for 2020.
Website for annual first 3% of compensation (can compensation or $56,000 for 2019
See the IRS’s 1 2020. Employer can deduct (1) amounts Employer can deduct (1) amounts
updates be reduced to as low as 1% in and $57,000 for 2020. Employer that do not exceed 25% of aggregate that do not exceed 25% of aggregate
any 2 out of 5 yrs.); or contribute can deduct (1) amounts that do compensation for all participants and compensation for all participants and
2% of each eligible employee’s not exceed 25% of aggregate (2) all salary reduction contributions. (2) all salary reduction contributions.
compensation.2 compensation for all participants and
(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 2019 and for 2020. 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 $280,000 for 2019 and $285,000 for 2020. Maximum compensation on which employer 2% contributions can be based is $280,000 for 2019 and $285,000 for 2020.
|
|
Payroll Deduction IRAs If your plan provides for it, you can choose to
Even if an employer doesn’t want to adopt a automatically enroll employees in SIMPLE IRA
retirement plan, the employer can allow its employees plans as long as the employees are allowed to choose
to contribute to an IRA through payroll deductions, not to have salary reduction contributions made
providing a simple and direct way for employees to to their SIMPLE IRAs or to have salary reduction
save. In this type of arrangement, the employee always contributions made in a different amount.
makes the decisions about whether, when, and how
SIMPLE IRA plans are easy to set up. You fill out a
much to contribute to the IRA (up to $6,000 for 2019
short form to establish a plan and ensure that SIMPLE
and for 2020, and $7,000 for 2019 and for 2020 if age
IRAs (to hold contributions made under the SIMPLE
50 or older, increasing thereafter).
IRA plan) are established for each employee. A
Some individuals eligible to contribute to an IRA financial institution can do much of the paperwork.
wait until the end of the year to set aside the money Additionally, administrative costs are low.
and then find that they don’t have sufficient funds to
You may have your employees set up their own
do so. Payroll deductions allow employees to plan
SIMPLE IRAs at a financial institution of their choice
ahead and save smaller amounts each pay period.
or have all SIMPLE IRAs maintained at one financial
Payroll deduction contributions are tax-deductible
institution you choose.
by the employee, to the same extent as other IRA
contributions.
Employees can decide how and where the money will
be invested, and keep their SIMPLE IRAs even when
Simplified Employee Pensions they change jobs.
(SEPs)
A SEP plan allows employers to set up SEP IRAs for Profit Sharing Plans
themselves and each of their employees. Employers Employer contributions to a profit sharing plan can
generally must contribute a uniform percentage of pay be discretionary. Depending on the plan terms, there
for each employee, although they do not have to make is often no set amount that an employer needs to
contributions every year. Employer contributions are contribute each year.
limited to the lesser of 25 percent of pay or $56,000
for 2019 and $57,000 for 2020. (Note: the dollar If you do make contributions, you will need to have
amount is indexed for inflation and may increase.) a set formula for determining how the contributions
Most employers, including those who are self- are allocated among plan participants. The funds are
employed, can establish a SEP. accounted separately for each employee.
SEPs have low start-up and operating costs and can be Profit sharing plans can vary greatly in their
established using a two-page form (Form 5305-SEP). complexity. Many financial institutions offer prototype
And you can decide how much to put into a SEP each profit sharing plans that can reduce the administrative
year – offering you some flexibility when business burden on individual employers.
conditions vary.
401(k) Plans
SIMPLE IRA Plans 401(k) plans have become a widely accepted
A SIMPLE IRA plan is a savings option for employers retirement savings vehicle for small businesses. An
with 100 or fewer employees. estimated 55 million U.S. workers participate in
401(k) plans that have total assets of about $5 trillion.
This plan allows employees to contribute a percentage
of their salary each paycheck and requires employer With a 401(k) plan, employees can choose to defer
contributions. Under SIMPLE IRA plans, employees a portion of their salary. So instead of receiving that
can set aside up to $13,000 in 2019 and $13,500 in amount in their paycheck today, the employees can
2020 ($16,000 in 2019 and $16,500 in 2020 if age contribute the amount into a 401(k) plan sponsored
50 or older) by payroll deduction (subject to cost-of- by their employer. These deferrals are accounted
living adjustments in later years). Employers must separately for each employee. Deferrals are made on
either match employee contributions dollar for dollar a pretax basis but, if the plan allows, the employee
– up to 3 percent of an employee’s compensation can choose to make them on an after-tax (Roth) basis.
– or make a fixed contribution of 2 percent of Many 401(k) plans provide for employer matching or
compensation for all eligible employees, even if the other contributions. The Federal Government and most
employees choose not to contribute. state governments do not tax employer contributions
and pretax deferrals (plus earnings) until distributed.
|
|
Like most profit sharing plans, 401(k) plans can vary ordinarily required under a traditional 401(k) plan.
significantly in their complexity. However, many Some automatic enrollment 401(k) plans are exempt
financial institutions and other organizations offer from the testing. This type of plan is for employers
IRS pre-approved 401(k) plans, which can greatly who want a high level of participation, and who have
lessen the administrative burden of establishing and highly compensated employees whose contributions
maintaining these plans. might be limited under a traditional 401(k) plan.
Safe Harbor 401(k) Plans Employees are automatically enrolled in the plan
A safe harbor 401(k) plan is intended to encourage and contributions are deducted from their paychecks,
plan participation among rank-and-file employees unless they opt out of contributing after receiving
and to ease the administrative burden by eliminating notice from the plan. There are default employee
the tests ordinarily applied under a traditional 401(k) contribution rates, which may rise incrementally over
plan. This plan is ideal for businesses with highly the first few years, although the employee can choose
compensated employees whose contributions would different amounts.
be limited in a traditional 401(k) plan.
Defined Benefit Plans
A safe harbor 401(k) plan allows employees to Some employers find that defined benefit plans offer
contribute a percentage of their salary each paycheck business advantages. For instance, businesses can
and requires employer contributions. In a safe harbor generally contribute (and therefore deduct) more each
401(k) plan, the mandatory employer contribution is year than in defined contribution plans. In addition,
always 100 percent vested. employees often value the fixed benefit provided by
this type of plan and can often receive a greater benefit
Automatic Enrollment 401(k) Plans at retirement than under any other type of retirement
Automatic enrollment 401(k) plans can increase plan plan. However, defined benefit plans are often more
participation among rank-and-file employees and complex and, likely, more expensive to establish and
make it more likely that the plan will pass the tests maintain than other types of plans.
To Find Out More… Also available from the U.S. Department of Labor:
The following jointly developed publications are DOL sponsors an interactive website – the Small
available for small businesses on the DOL and IRS Business Retirement Savings Advisor that–
websites and through DOL’s toll-free number listed encourages small business owners to choose the
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
(Publication 4806) for Plan Fiduciaries
SEP Retirement Plans for Small Businesses Tips for Selecting and Monitoring Service Providers
(Publication 4333) for Your Employee Benefit Plan
SIMPLE IRA Plans for Small Businesses Also available from the Internal Revenue Service:
(Publication 4334) Retirement Plans for Small Business (SEP, SIMPLE,
and Qualified Plans) (Publication 560)
For business owners with a plan:
Adding Automatic Enrollment to Your 401(k) Contributions to Individual Retirement Arrangements
(IRAs) (Publication 590-A)
Plan (Publication 4721)
Retirement Plan Correction Programs Distributions from Individual Retirement
Arrangements (IRAs) (Publication 590-B)
(Publication 4224)
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
|
|
EMPLOYEE BENEFITS SECURITY ADMINISTRATION
UNITED STATES DEPARTMENT OF LABOR
Publication 3998 (Rev. 11-2019) Catalog Number 34066S
Department of the Treasury Internal Revenue Service www.irs.gov
November 2019
|