Setting up an employee retirement plan can be unnerving. The choices are many and the details can get complicated. What follows is a summary of qualified retirement plans and the steps you should take to implement them.
[Read: What You Need to Know About Qualified vs. Non-Qualified Benefit Plans]
Payroll Deduction IRA
This is the least costly retirement plan for an employer. Administration is simple and there is no employer contribution. Payroll deductions are made using either pre-tax (Traditional) or after-tax (Roth) employee dollars. Maximum contribution for 2020 is $6,000 ($7,000 for participants over 50). To implement a Payroll Deduction IRA, taking the following steps:
- Employee sets up IRA with a financial institution.
- Payroll administrator is instructed to make the deductions and forward them.
Note: There are no forms for the employer to fill out.
SEP IRA
Simplified Employee Pension (SEP) IRAs are fully funded by the employer. SEP IRAs are a good choice for businesses with just a handful of employees. Contributions are capped at $57,000 for 2020. Uniform SEP IRAs must be offered to all eligible employees. Annual contributions are not required. A SEP IRA can be set up until the due date of your business tax return for the year in which the plan will be established. Following are the steps to setting up a SEP IRA:
- Execute a written agreement using IRS FORM 5305-SEP. Alternately, a prototype document provided by a financial institution can be used.
- Inform your eligible employees of the existence of the SEP IRA and specific details about it.
- Employees must be given a copy of FORM 5305-SEP or the prototype document.
SIMPLE IRA
If you have less than 100 employees and no current retirement plan, you can set up a SIMPLE IRA. This plan is funded by pre-tax dollars contributed by the employee as well as funds contributed by the employer. For 2020, employee contributions are capped at $13,500 ($16,500 for those over 50). With some exceptions (new businesses, for example), employers can set up a SIMPLE IRA from January 1 to October 1. Following are the steps to setting up a SIMPLE IRA:
- Choose a financial institution (bank, insurance company, credit union) to act as trustee, or allow your employees to choose their own.
- Execute a written agreement. Use IRS FORM 5304-SIMPLE if each employee will choose a financial institution or 5305-SIMPLE if all employees will use the financial institution you have chosen.
- Notify employees of their opportunity to make or change the amount of contribution and what the employer matching will be.
- Provide a summary plan description, available from the financial institution(s).
- Set up an individual SIMPLE IRA for each employee.
The ability to save for retirement is important to current and potential employees.
Profit-sharing plan
Any employer can set up a profit-sharing plan and contribute up to 100% of the employee’s annual salary (capped at $57,000). The decision to contribute is made from year to year, so sharing the wealth after a good year does not tie you in to doing the same in the future. Profit-sharing plans can get complex. There are regulations regarding eligibility, vesting and withdrawals. The assistance of a financial institution or benefit advisor is recommended. Steps to implementing a profit-sharing plan are as follows:
- Determine the amount to contribute.
- Determine how to divide the total among employees.
- Deposit funds in a separate account for each employee.
- File IRS FORM 550 annually.
[Read more: Outsourcing HR: Is a PEO or ASO Right for You?]
401(k)
401(k) plans are defined contribution plans, meaning there is no set benefit promised. Money is contributed by the employee and, in most cases, the employer. No matter what form of 401(k) you choose—traditional, safe harbor or SIMPLE—you will most likely find the assistance offered by a financial institution or benefit advisor invaluable.
Professional assistance doesn’t come without a cost, and Congress recognized this when it passed the Setting Every Community Up for Retirement (SECURE) Act at the end of 2019. Among a multitude of changes to existing retirement savings regulations, the SECURE act offers a tax credit of up to $5,000 for businesses that set up new retirement plans, with an additional $500 credit for those with automatic enrollment. Following are steps to implementing 401(k) plans:
- Research plan options. There are advantages and disadvantages as well as specific requirements for each. A benefit advisor can help sort it all out.
- Choose a plan.
- Arrange a trust fund to hold the assets of the fund.
- Inform your employees.
The ability to save for retirement is important to current and potential employees. Choosing and setting up a plan to assist them is a project well worth the effort.
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