Payroll Deduction IRAs Even if an employer does not want to adopt a retirement plan, the employer can allow its employees to contribute to an IRA through payroll deductions, providing a simple and direct way for employees to save. In this type of arrangement the employee always makes the decisions about whether, when, and how much to contribute to the IRA (up to $5,000 in 2012 and $5,500 in 2013, and $6,000 in 2012 and $6,500 in 2013 if age 50 or older, increasing thereafter).
Some individuals eligible to contribute to an IRA wait until the end of the year to set aside the money and then find that they do not have sufficient funds to do so. Payroll deductions allow employees to plan ahead and save smaller amounts each pay period. Payroll deduction contributions are tax-deductible by the employee, to the same extent as other IRA contributions.
Simplified Employee Pensions SEPs: A SEP plan allows employers to set up SEP IRAs for themselves and each of their employees. Employers must contribute a uniform percentage of pay for each employee, although they do not have to make contributions every year. Employer contributions are limited to the lesser of 25 percent of pay or $50,000 in 2012 and $51,000 in 2013. Note: the dollar amount is indexed for inflation and may increase. Most employers, including those who are self-employed, can establish a SEP.
SEPs have low start-up and operating costs and can be established using a two-page form. And you can decide how much to put into a SEP each year – offering you some flexibility when business conditions vary.
SIMPLE IRA Plans: A SIMPLE IRA plan is a savings option for employers with 100 or fewer employees. This plan allows employees to contribute a percentage of their salary each paycheck and requires employer contributions. Under SIMPLE IRA plans, employees can set aside up to $11,500 in 2012 and $12,000 in 2013 ($14,000 in 2012 and $14,500 in 2013 if age 50 or older), by payroll deduction (subject to cost-of-living adjustment in later years). Employers must either match employee contributions dollar-for-dollar – up to 3 percent of an employee’s compensation – or make a fixed contribution of 2 percent of compensation for all eligible employees, even if the employees choose not to contribute.
If your plan provides for it, you can choose to automatically enroll employees in SIMPLE IRA plans as long as the employees are allowed to choose not to have salary reduction contributions made to their SIMPLE IRAs or to have salary reduction contributions made in a different amount.
SIMPLE IRA plans are easy to set up. You fill out a short form to establish a plan and ensure that SIMPLE IRAs (to hold contributions made under the SIMPLE IRA plan) are established for each employee. A financial institution can do much of the paperwork. Additionally, administrative costs are low. You may either have your employees set up their own SIMPLE IRAs at a financial institution of their choice or have all SIMPLE IRAs maintained at one financial institution you choose.
Employees can decide how and where the money will be invested, and keep their SIMPLE IRAs even when they change jobs.
Profit Sharing Plans: Employer contributions to a profit sharing plan can be discretionary. Depending on the plan terms, there is often no set amount that an employer needs to contribute each year. If you do make contributions, you will need to have a set formula for determining how the contributions are allocated among plan participants. The funds are accounted separately for each employee.
Profit sharing plans can vary greatly in their complexity. Similarly, many financial institutions offer prototype profit sharing plans that can reduce the administrative burden on individual employers.
401(k) Plans: 401(k) plans have become a widely accepted retirement savings vehicle for small businesses. According to the most recent data, an estimated 51 million U.S. workers participate in 401(k) plans that have total assets of about $3 trillion. With a 401(k) plan, employees can choose to defer a portion of their salary. So instead of receiving that amount in their paycheck today, the employees can contribute the amount into a 401(k) plan sponsored by their employer. These deferrals are accounted separately for each employee. Deferrals are made on a pretax basis but, if the plan allows, they can be made on an after-tax (Roth) basis at the employee’s choosing.
Many 401(k) plans provide for employer matching or other contributions. The Federal Government and most state governments do not tax employer contributions and pretax deferrals (plus earnings) until distributed. Like most profit sharing plans, 401(k) plans can vary significantly in their complexity. However, many financial institutions and other organizations offer prototype 401(k) plans, which can greatly lessen the administrative burden of establishing and maintaining these plans.
Safe Harbor 401(k) Plans A safe harbor 401(k) plan is intended to encourage plan participation among rank-and-file employees and to ease administrative burden by eliminating the tests ordinarily applied under a traditional 401(k) plan. This plan is ideal for businesses with highly compensated employees whose contributions would be limited in a traditional 401(k) plan.
A safe harbor 401(k) plan allows employees to contribute a percentage of their salary each paycheck and requires employer contributions. In a safe harbor 401(k) plan, the mandatory employer contribution is always 100 percent vested.
Automatic Enrollment 401(k) Plans Automatic enrollment 401(k) plans can increase plan participation among rank-and-file employees and make it more likely that the plan will pass the tests ordinarily required under a traditional 401(k) plan. Some automatic enrollment 401(k) plans are exempt from the testing. This type of plan is for employers who want a high level of participation, and who have highly compensated employees whose contributions might be limited under a traditional 401(k) plan.
Employees are automatically enrolled in the plan and contributions are deducted from their paychecks, unless they opt out of contributing after receiving notice from the plan. There are default employee contribution rates, which may rise incrementally over the first few plan years, although the employer can choose different amounts. In addition, for certain default investment options provided under the plan, there is relief from liability for the investment results.
Defined Benefit Plans Some employers find that defined benefit plans offer business advantages. For instance, businesses can generally contribute (and therefore deduct) more each year than in defined contribution plans. In addition, employees often value the fixed benefit provided by this type of plan and can often receive a greater benefit at retirement than under any other type of retirement plan. However, defined benefit plans are often more complex and, likely, more expensive to establish and maintain than other types of plans.
