Primer for Small Business Retirement Plans and Deadlines for Allowable Contributions
September 4, 2018 By Cesar de la Cerda
A business retirement plan can be created at any time of the year, however, if you want to take advantage of making contributions count toward that entire calendar year, there are certain rules to follow. The deadline for creating a retirement plan depends on the type of plan you set up, again in terms of taking advantage of making the full allowable contribution. In this primer, I will mention a few of the different retirement plans, the deadlines and some strategies that can help a business owner.
October 1st is the first pressing date for either SIMPLE IRA, SIMPLE 401(k) or a safe harbor 401(k). If the plan is created no later than October 1st, an owner may contribute the max allowable contribution and match described on the adoption agreement for the year. I named them in order of simplicity to slightly more complex. There are also the SEP IRA, which must be filed by October 15th and a SOLO 401(k) that can be set up by December 31st. There are pros and cons to each type of plan. So, determining which plan fits your business best could be better addressed by working with a financial advisor, an investment company and/or a recordkeeper that can help administer the plan.
The SIMPLE IRA offers the least amount of administrative requirements, least expenses to operate and the smallest allowable maximum contribution by employees compared to the other plans mentioned. A SIMPLE IRA plan is for businesses with fewer than 100 employees. This plan makes sense for employers wishing to be competitive relative to smaller companies that don’t offer a retirement plan or even larger employers that might have a poorly performing plan. This type of plan doesn’t require the typical administrative fee range of $1,000 to $4,000 per year. The owner can select to match to all without employee contributions or match for those who do contribute only. Additionally, employees are fully vested in company paid contributions and can take them if they terminate service. The benefit to the owner would be the ability to contribute the maximum allowable and then match the contribution.
The SIMPLE 401(k) is similar to the SIMPLE IRA mentioned above. This plan type has optional participant loans and hardship withdrawals. This administrative aspect increases the costs and time to operate. Additionally, the SIMPLE 401(k) can also have a Roth 401(k) feature. Choosing between either of these programs ultimately depends on the goals you would like to accomplish. Similarly these types of plans are for businesses that have 100 or fewer employees. Once the business exceeds this size or would or would like to increase the allowable contributions, the 401(k) makes more sense.
The safe harbor 401(k) is more complex and can work for small businesses, but is more appropriate for businesses with 100 or more employees. There are more administrative duties and responsibilities to operate, which tend to drive up costs for maintaining. Something to also consider is that certain costs to administer can be shared with employees. This type of retirement plan that meets certain requirements could make it exempt from ADP and/or ACP testing. This can be a big deal if more highly compensated are contributing higher amounts than lower wage earners, or merely participants electing to pay down debt or other big expenses versus saving. This provision makes it similar to the other programs, in which employer contributions are fully vested.
The last two programs, the SEP IRA and the Solo 401(k) are a great option for single owners wishing to make higher contributions in a year versus smaller contribution limits to an IRA. The SEP IRA allows for contributions only by the employer, which is the owner, generally, or close partners. This plan type could work great with closely held family businesses or a few limited partners with no other full time employees. If the business did have employees that are W-2 employees, the business alone would establish the retirement account for the employees behalf and fund it. The Solo 401(k) has similar benefits to the SIMPLE 401(k) in that you can add a Roth feature, but maximize even greater savings by adding profit-sharing.
Small businesses newly started, in the first few years of existence, or mature ones have many challenges, but not setting up a retirement plan that can help them save better and attract better talent shouldn’t be one of them.
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