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This is a guest post from Tim Chen, the CEO of NerdWallet, an unbiased resource for the best business credit cards.
A new round of tax reforms, which could be announced as early as this December, may jeopardize small business owners’ ability to provide retirement benefits for employees. The reforms, which are part of the push to reduce the federal deficit, could eliminate employer incentives to provide retirement benefits, making it impossible in many cases for small business owners to afford to do so. Such a shift could make it harder for small businesses to compete with larger corporations, by reducing their ability to attract and retain talent.
Until now, tax incentives have rewarded business owners who provide retirement benefits by making employer contributions to retirement plans tax-deductible, a compelling bonus for many small business owners. For employees, the new reforms are likely to lead to lowered caps on personal contributions and may remove the tax-deductible status of such contributions. Instead, employees would receive a flat tax credit of 18% or 30% when they withdraw funds in their old age.
The move is likely to hurt both small business owners and their employees, who are statistically less likely to invest in their own retirement plans without the incentive of employer contributions.
If you’re a small business owner, the choice to provide retirement benefits to your employees will depend to a large extent on what you can afford. Fortunately, there are a variety of options out there, so you can choose the type of plan that works best for you and your business. Let’s take a look at some of the most common choices for small business owners.
SEP IRAs
Simplified Employee Pensions, or SEP IRAs are one of the most flexible ways for employers to contribute to employee retirement plans. Employers fund the plans exclusively, so there are no requirements for you to match employee contributions. As of 2011, employer contributions are capped at $49,000 per employee per year. Yearly contributions can range from 0% to 25% of an employee’s income. This flexibility is perfect for small business owners; if times are lean at your company, you can hold off contributing and make up the difference in a better year. Also, employer contributions are (at least for now) tax-deductible.
If you’re on the employee side of the equation, keep in mind that this type of plan offers no emergency loan or “Roth option,” and you won’t be able to do any catch-up if you’re over 50.
SIMPLE IRAs
These plans aren’t as simple as the name implies. are also known as With Savings Incentive Match Plans for Employees, or SIMPLE IRAs, both employers and employees contribute to the plan, and employers must match up to 3% of each employee’s wages. The employer contribution cap is lower with SIMPLE IRAs than it is with a 401(k) plan. Employee contribution caps are also lower, coming in at $11,500 per year (as of 2011).
Like the SEP IRA, this type of plan doesn’t offer any Roth option, nor does it allow employees to take emergency loans from their retirement plan. The lower contribution caps may appeal to some small business owners who find the SIMPLE IRA more affordable than a 401(k).
401(k) plans
These plans, like rewards credit cards, have more perks and offer more flexibility. They also tend to be more costly and complicated for small business owners to offer. 401(k) plans offer the highest contribution limits for both employers and employees, and employees over 50 can play catch-up with higher contribution limits.
As an employer, you can limit which employees are eligible for the plan, allowing you to reward long-term loyalty to your company. Employee contributions are capped at $16,500 (as of 2011). While employees can choose to make tax-deferred contributions to their plans over the course of their careers, they can also opt for a Roth 401(k) in which they pay all taxes upfront.
For small business owners, these plans can make life more complicated. Employers who offer 401(k) plans must meet Employee Retirement Income Security Act (ERISA) regulations and standards. Like the Durbin Amendment, ERISA is intended to protect the public, but it can make your job as an employer more complicated. Employers who offer 401(k) plans are also subject to increased IRS reporting requirements.
Related articles
- Boost Your Retirement Savings
- Help! I don’t know what retirement plan you’re talking about!
- The Basics of a Traditional IRA
© 2011, Bruce Mc. All rights reserved.
This is a great overview of the plan options available to small employers. Also, they can do a simple profit sharing plan and if the census date is favorable a defined benefit plan. The latter could generate some very large deductions for an older workforce for a very successful company.
In addition, small employers also have some very important worker classification concerns. The IRS has just issued a VCSP program that allows employers to come clean where they have been treating workers as independent contractor when they should be employees. This may be a good way to resolve a pending problem, but it may have other implications where these workers now become eligible for other company benefits. For more details readers may want to see
Employers Playing Tax Games with Workers: IRS Offers Way to Come Clean at the following link: http://sjfpc.com/IRS_Payroll_Taxes_VCSP.html