To keep a competitive edge and attract the best talent to your business, it is important to offer the benefits that your employees want most. Retirement benefits are the second most desired benefit, falling just behind health care benefits. Choosing the best retirement plan for your business will depend on the number of employees and whether your business is a sole proprietorship, an LLC, or a corporation. Here are a few good options to consider.
If you are self-employed, then a SEP-IRA is a great option. Even as a sole-proprietor, you as owner can receive the same benefits that would be offered to employees. The maximum contribution allowed per year is relatively high, sitting at 25% of your annual income or 61,000, whichever is less, in 2022. This creates a double benefit for sole proprietors, who get to make pre-tax contributions and claim any business-funded matching as a deduction. Bottom line, you can save more with a SEP-IRA. The SEP-IRA is also one of the simpler plans administratively, with minimal paperwork and no IRS reporting. However, if you have employees and you choose the SEP-IRA, you must contribute the same amount across the board into each employee’s account, including your own.
If you want to provide a 401(k) plan for your business, there are several options. The three basic 401(k) plans are Standard profit sharing 401(k)’s, Simple 401(k)’s, and Safe Harbor profit sharing plans. Standard profit sharing 401(k) plans give employers the flexibility to choose their desired level of contributions, including the option to contribute nothing. The downside is that this plan is highly complex, with massive amounts of paperwork and required IRS equality testing. The Simple 401(k) plan is ideal for smaller businesses, with less than 100 employees. While this plan does not require IRS equality testing, it does enforce employer contributions. Finally, the Safe Harbor profit sharing plan was designed to eliminate the need for nondiscrimination testing by enforcing highly structured employer contributions. A safe harbor 401(k) helps you avoid onerous IRS rules.
While the SIMPLE IRA is easy to set up and maintain, the name is actually an acronym that stands for Savings Incentive Match Plan for Employees. This plan provides free setup, allows for relatively high employee contributions through elective deferrals, and requires relatively low employer matching. The simple IRA is exempt from nondiscrimination testing and is easy to file. All of this means that the SIMPLE IRA is another great option for smaller businesses.
With great options and an abundance of support, offering a retirement plan at your business is simple. And because of the tax exemptions and credits available to businesses, it is an affordable benefit to provide.
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