As a small business owner, planning for retirement, and how it is going to be funded, often takes a back seat to the everyday operations of running your business. In this Mutual Fund Minute we want to get you thinking about investing for your, and/or your employees’, future. We will introduce you to the straightforward investment options of two small business retirement plans. Those plans are the Simplified Employer Pension Plan (“SEP”) and the Savings Incentive Match Plan for Employees (“SIMPLE”). Each plan will be outlined and discussed below.
SEP – A Simplified Employer Pension plan (“SEP”) is an uncomplicated, easy to set up and maintain retirement plan, instituted by the small business owner, which allows them, as employer, to make tax-deductable contributions to a traditional IRA, on behalf of their employees.
SIMPLE – A Savings Incentive Match Plan for Employees (“SIMPLE”) is similar to the SEP, easy to set up and maintain retirement plan, with the following differences. A SIMPLE plan allows employees to contribute to a traditional IRA through salary reductions, as well as directing employers to match a percentage of their employee’s contributions.
SEP – Frequently Asked Questions
Who is Eligible for a SEP? Sole proprietors, partnerships, incorporated and unincorporated small businesses including Sub S corporations and individuals with self employment income are eligible to start a SEP.
Who is best suited for a SEP? Employers who wish to make tax deductible retirement plan contributions both for themselves and on behalf of their employees (who therefore receive a tax free fringe benefit). This could be beneficial in attracting or retaining key employees in a competitive labor market.
Which employees must be included in the plan? At a minimum, all employees age 21 or older who earned $500 or more during the current year if they have worked for the business in 3 of the past 5 years must be included in a SEP plan.
Must the employer make a contribution each year? The employer has total discretion whether or not to make a contribution each year under a SEP. The employer need not make any contribution.
How much will an employer save on its federal income taxes by making a SEP contribution? Savings depend upon the employer’s marginal income tax bracket. A corporation would list its deduction for SEP contributions on its corporate tax return. A self-employed person deducts contributions on Form 1040, and from employees on Schedule C or F.
How do I get started? Contact your local retirement plan professional, who can advise you on how to set up, administer and maintain your IRS model SEP.
SEP – Advantages of a SEP
· Contributions to a SEP are tax-deductible and your business pays no taxes on the earnings on the investments.
· As an employer, you are not locked into making contributions every year. In fact, you decide each year whether, and how much, to contribute to your employees’ SEP-IRA.
· Generally, you do not have to file any documents with the government.
· Sole proprietors, partnerships and corporations, including S corporations, can set up SEPs.
· Administrative costs are low.
· Easy to maintain.
SIMPLE – Frequently Asked Questions
How does a SIMPLE plan work? Here is one example. Jim works for the Sandbar Company, a small business with 50 employees. Sandbar has decided to establish a SIMPLE IRA plan for all its employees and will match its employees’ contributions dollar-for-dollar up to 3 percent of each employee’s salary. Under this option, if a Sandbar employee does not contribute to his or her SIMPLE IRA, then that employee does not receive any matching employer contributions from Sandbar.
Jim has a yearly salary of $50,000 and decides to contribute 5 percent of his salary to his SIMPLE IRA. Jim’s yearly contribution is $2,500 (5 percent of $50,000). The Sandbar matching contribution is $1,500 (3 percent of $50,000). Therefore, the total contribution to Jim’s SIMPLE IRA that year is $4,000 (his $2,500 contribution plus the $1,500 contribution from Sandbar). The financial institution partnering with Sandbar on the SIMPLE IRA has several investment choices and Jim is free to pick and choose which ones suit him best.
Which employers can start a SIMPLE plan? Generally SIMPLEs are available to any employer with no more than 100 employees. However, an employer may not have a SIMPLE plan if it provides benefits under another qualified retirement plan.
What are the tax benefits of a SIMPLE plan? All amounts contributed to a SIMPLE plan are taxed deductible by the employer. Employees are not taxed on salary they deferred. All plan earnings are tax-deferred.
May a participant "opt out" of a SIMPLE IRA plan? An employee may not "opt out" of participation. Of course, any eligible employee may choose not to make salary reduction contributions for a year, in which case such employee would accrue no employer matching contributions for the year, but would receive an employer non-elective contribution for the year if the plan provides for such contributions for the year.
SIMPLE – Employer Quick Review
· Choose a financial institution to set up your SIMPLE IRA plan.
· Enroll your employees and start salary reduction contributions.
· Deposit your contributions timely.
· Tell your employees about their rights under the plan.
· Monitor your trustee.
As this is simply an overview of the two plans, we hope it got you thinking about your retirement options. You have an important role to play in not only securing your own long term financial independence, but also in helping America’s workers save for retirement. By instituting a work place retirement saving plan, you will join more than one million other small businesses that have helped themselves and their employees save for the future. In addition to helping your business, your employees and yourself, these retirement programs can provide lasting tax advantages to both employer and employees alike.
As always, thank you for your continued interest in The Mutual Fund Minute. For additional information on this edition’s topic, give us a call. I can be reached at (414) 771-3340 or email me at firstname.lastname@example.org.