Skip to main content

High Contribution Plans for Business Owners

Studies show that most working individuals will roughly 60-80{bc669dfb3651bb8509a96034cbe7494d3a811fc0eedf0ddccb239fb9cb737439} of their pre-retirement income to maintain their standard of living in their later years.

As a business owner, this statistic comes with a heavy burden. How do you know the retirement plan you’ve chosen for your business is beneficial to you, the business and your employees?

Retirement plans for business owners are financial burdens; however, choosing a cost-effective plan that suits your business and financial profiles while allowing employees to save for their futures does not have to be stressful. We’re here to help.

Choosing a Plan: The Basics

The most basic step to figuring out which plan works best for your business is to figure out what kind of business you are. Retirement plans should work for you, your business, and your employees. In a lot of cases, pension plans can double as excellent business strategies.

For example: is your business new or does your business have a fluctuating income? An SEP IRA or a profit-sharing plan allows for discretionary contributions. This means that, during financially challenging years, you do not need to fund these plans.

Do you have high employee turnover? If so, you might want a pension plan that vests your contributions on a schedule. This way, employees will have to work for set a number of years before becoming eligible to withdraw their contributions if they quit. In this instance, a solid retirement plan boosts employee retention and saves business owners the time and resources it takes to train new hires.

You have a lot of retirement plan options; however, this also means that there is an option for every business. You can choose your retirement option based on any of the following factors:
Complexity. What is the administrative upkeep of the plan?
–  Contribution amount desired.
Funding responsibility
Benefits and features available

Speaking to a trusted financial adviser can help you prioritize which factor is the most important to your company and can find you the best retirement plan to suit your needs.

Below we are going to briefly cover the details of two of the most commonly used plan categories for small businesses: IRA-based Plans and Qualified Plans.

IRA-Based Plans

For new businesses, IRA-based plans are the most popular choice. This is because IRA-based plans require little administration and are the easiest to explain.

The Simplified Employee Pension (SEP) is one type of IRA-based employer plan. With this type of plan, the responsibility for funding relies solely on the business. For businesses that have a fluctuating profit margin from year to year, SEP programs are an excellent choice, as the contributions are optional. Should you undergo financial hardship you do not have to fund the SEP account. The downside to this account is that any contributions made are 100{bc669dfb3651bb8509a96034cbe7494d3a811fc0eedf0ddccb239fb9cb737439} vested immediately. This means employees can withdraw their balance at any time.

SIMPLE IRAs are plans that are funded by both employee and employer contributions. An employee’s contributions are known as salary-deferral contributions, and are made on a pretax basis from his or her salary. This reduces the employee’s taxable income. Just as with SEP plans, the contributions for this type of plan are immediately and 100{bc669dfb3651bb8509a96034cbe7494d3a811fc0eedf0ddccb239fb9cb737439} vested. Unlike an SEP plan, employer contributions to a SIMPLE IRA are mandatory. If you choose to match contributions, you only need to do so for employees who make salary-deferral contributions.

Business Qualified Retirement Plans

Qualified plans come in two forms: defined benefit plans and defined contribution plans. For business owners – particularly newer business owners – the best qualified plans are defined-contribution plans.

Profit sharing plans are one option for business owners. In this type of plan, contributions are discretionary and rest solely with the employer. A benefit to this type of plan is that it allows for a vesting schedule, meaning that employees can have as a requirement to work for a set number of years before they can access the contributions made to the account.

Profit sharing occasionally includes a loan feature, which allows the borrower to pay back him or herself, rather than paying interest to a bank. The downside to this plan is that there are strict rules surrounding borrowing and vesting schedules, so ensuring that you are in compliance with these regulations may require more administrative work.

A 401(k) plan is another type of qualified plan and is funded by salary-deferral contributions. An employer can choose to add a profit-sharing feature or can make matching contributions for each employee who makes a salary-deferral contribution. A 401(k) plan allows allows employers the option of a vesting schedule or loans.

The downside to qualified plans is that they are more complicated than IRA plans and may incur additional administrative costs. Of the two, a 401(k) is the most complex and, therefore, the most expensive to maintain. Additionally, qualified plans favor higher paid employees over lower-salaried employees, as they are contributing more. If you choose to go with a qualified plan, be sure to speak to a financial adviser!

Your business cannot function without your employees. Choosing a retirement plan not only shows you care about the future of your employees, but can protect the future of your company.