Retirement plan options for small businesses

Retirement plan setup and maintenance can prove to be a confusing and costly undertaking for any small business. Small business owners looking for a low-cost, low-maintenance opportunity to establish a retirement plan can utilize the Savings Incentive Match Plan for Employees (SIMPLE) or Simplified Employee Pension (SEP) plan rules to take advantage of valuable tax savings today while providing a future benefit for themselves and their employees at retirement.


Under the SIMPLE plan rules, employees may choose to make salary reduction contributions up to a maximum of $12,000 ($14,500, if over age 50) for 2013 and the employer is required to make a tax deductible matching or non-elective contribution. Under the SEP plan rules, an employer may be eligible to make a tax deductible contribution to employees’ SEP accounts up to the lesser of 25 percent of compensation or $51,000 for 2013. The employer contribution must be made by the employer’s tax filing deadline, including valid extensions, for the deduction to be taken for that tax year.

The administrative costs (start-up and operating) are relatively low for these plans in comparison with a conventional retirement plan. Additionally, the employer may be eligible for a tax credit of up to $500 for each of the first three years of the plan for the costs related to starting up a plan. Once funded, the account is owned and controlled by the employee. Thus, it provides a powerful low-cost employee recruiting and compensation tool and moves the risk of investment decisions to the employee.

Setup and maintenance guidelines

The first step in establishing a plan is selecting a financial institution because, typically, the financial institution will become the trustee and assist with receiving and investing plan assets and maintaining the communication and compliance requirements for the plan. Accounts are set up for each eligible employee that meets the participation requirements and all eligible employees must receive the same benefits. A financial or tax advisor can assist with set up. These simplified retirement plan options are powerful tools that can assist both employees and employers in providing for retirement while offering tax deductible benefits.

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