Tax & Business Services

Not only should you think about your own retirement planning, you should think about giving your employees the opportunity to invest in their future as well. Retirement plans are often tax deductible and may not be as costly as you think.

Basic retirement planning for small businesses includes plans such as SEPs (Simplified Employee Pensions), SIMPLEs (Savings Incentive Match Plan for Employees), and qualified plans. Below is a summary chart that outlines the basic rules for each plan.

Simplified Employee Pensions (SEP)
Simplified Employee Pensions (SEPs) are perhaps the easiest way for business owners to provide employees with retirement benefits. Through an institution of his or her choice, the business owner sets up an Individual Retirement Arrangement (IRA) which is for the owner and the employees. The business owner can then make contributions on behalf of the employees.

Savings Incentive Match Plan for Employees (SIMPLE)
A Savings Incentive Match Plan for Employees (SIMPLE) is a more complicated type of retirement plan. The SIMPLE may be set up by an employer with no more than 100 employees who have at least $5,000 in compensation for the preceding year. A SIMPLE can be an IRA or a 401(k). If the plan is set up as an IRA, a separate account is set up at a financial institution. Employees can make salary-reducing contributions, and employers can contribute matching or non-elective funds.

Qualified Plan
Qualified plans are the most complicated types of retirement plans available to small business owners. There are two types of plans: defined contribution and defined benefit plans. Most plans that are set up by small businesses are defined contribution plans.

A defined contribution plan requires an individual account to be set up for each participant. There are 2 types of plans classified as defined contribution plans: profit sharing and money purchase pension plans. Profit sharing plans are based on business profits. If the business makes a profit, so does the employee. A money purchase pension plan allows for contributions based on a percentage of the employee's compensation without regard to company profits.

A defined benefit plan is any plan that is not a defined contribution plan. Amounts contributed are based on amounts needed to produce a certain amount of benefit to participants.

IRA Contributions
Employers may allow employees to designate their retirement planning contributions as Roth IRA contributions. Amounts contributed will not be excluded from income. However, all amounts (including earnings) received in qualified distributions will be tax-free. Making the Roth election will potentially provide long-term savings but will make it more expensive to make current contributions.