Individual Retirement Accounts (IRAs) and Other Retirement Plans

The IRS approves a number of easy to administer alternative retirement plans that may be appropriate for small businesses.

Individual Retirement Accounts (IRAs) can be beneficial for businesses with fewer than 100 employees. Administration is easy and there is no expensive discrimination testing. Startup costs are lower than for a 401k. The pre-tax benefits for employers are similar to the 401k, but there are stricter restrictions, lower limits and fewer investment options.

Simplified Employee Pension (SEP) IRAs are a good choice for the self-employed and businesses with between 5 and 20 employees. The set up deadline is later than for most plans, on tax day. Contributions into SEP IRAs established after 31 December 1996 can only be made by employers. Contributions are between 0 and 25 percent of the salary. The same percentage must be contributed to every eligible employee, but contributions do not have to be made every year. The 2009 limit was 49,000 dollars.

Savings Incentive Matching Plan for Employees (SIMPLE) IRAs are another option, offering flexibility and simple administration. They are ideal for businesses with fewer than 100 employees with no other retirement plans. Employees who have earned at least 5000 dollars and have done so in two previous years are eligible. Employers match their employees contributions up to 3 percent or 11,500 dollars, or contribute 2 percent to all eligible employees. The limits are lower than for a 401k plan. Contributions can be reduced for two years out of every five. Matched funds are 100 percent vested. Employees may choose to make their own contributions. SIMPLE IRAs must be established between January 1st and October 2nd.

A SIMPLE 401k plan can be a good choice for businesses with fewer than 100 employees. Employees aged at least 21 who have been employed for at least a year are eligible. Administration is simple and there is no discrimination testing. Employers must match contributions for all eligible employees, either at a flat 2 percent rate for everyone or by contributing up to 3 percent of each employee’s salary. Matched contributions are 100 percent vested. The limits are lower than for a traditional 401k. In 2009, the limit was 11,500 dollars, with a 2500 dollar catch up limit for employees over the age of 50.

A solo 401k can be the best option for a sole proprietor, as long as there are no employees other than a spouse. Administration is easy and cheap, but the plan offers similar benefits to a 401k. The limits are high and there is no possibility of the plan becoming top heavy. The 2009 limit was 15,500 dollar from the salary and 32,500 dollars profit share, with contributors over 50 being able to make additional contributions of up to 5000 dollars a year.

A KEOGH profit sharing plan is another option that can work well for businesses with 10 to 15 highly compensated employees. These are expensive plans but with similar fees to a 401k.

Related posts:

1. Discrimination Testing for 401k Retirement Plans
2. The 401k Employee Retirement Plan
3. Introduction to Employee Retirement Plans

Posted in general

Tags: , 401k plan, Administration, Auto, choice, contribute 2, Contributions, dollar, Draft, eligible employee, eligible employers, individual retirement accounts, investment, Matched, Pension, percent, plan contributions, Retirement, sep iras, simple administration, simplified employee pension, Startup, startup costs