Choosing a Retirement Plan for a Small Business

Many small-business owners share a variety of critical priorities, such as managing taxes, attracting and rewarding valued employees, and establishing a long-term strategy to help plan for their own financial future. Fortunately, small-business owners also share an option that could help address all of those goals: sponsoring a workplace retirement plan.

There are three broad categories of retirement plans available to small businesses. The one you choose may reflect your company's size, financial situation, and ability to comply with regulatory oversight and administrative responsibilities. You may want to consult a financial professional to help you choose a plan that meets your needs.

SEP-IRAs

A Simplified Employee Pension plan (SEP-IRA) may be appropriate for a one-person business or a business with just a few employees. It is relatively inexpensive and easy to start and administer. SEP-IRAs also offer small-business owners flexibility regarding both the amount and timing of contributions. As a result, a SEP-IRA may make more sense for a business with profits that tend to fluctuate from year to year.

  • Employer, not employees, makes contributions.
  • Employees are immediately vested.
  • Once set up, the plan must generally cover any employee who is 21 or older, earned at least $600 from the business, and has worked there during at least three of the preceding five years.
  • The 2018 annual contribution limit for each employee is 25% of compensation (or, for the self-employed, net earnings) or $55,000, whichever is less.

SIMPLE IRAs

The Savings Incentive Match Plan for Employees (SIMPLE IRA) is typically valued for its ease of administration and is available to businesses with 100 or fewer employees.

  • Employees may contribute up to $12,500 of salary in 2018.
  • Employer must make a matching contribution of up to 3% of each worker's annual compensation, but may match as little as 1% in two out of any five consecutive years.
  • Employer may instead make nonelective contributions equal to 2% of compensation for each worker who has earned at least $5,000 during the year, whether or not a worker has elected to contribute.
  • For 2017, the maximum compensation amount that can be used to determine the contribution amount is $275,000.

Qualified Plans

Qualified plans are generally more complex than SEP-IRAs or SIMPLE IRAs and,oftenhave more stringent reporting requirements. But they can be more appropriate for larger or growing businesses. There are several types of qualified plans, which can be broken down into two broad categories: defined benefit and defined contribution plans.

  • Defined benefit plans -- Commonly referred to as pension plans, defined benefit (DB) plans promise to pay employees a steady income stream in retirement. The amount each employee receives is based on earnings history and length of service. Employers must contribute enough to the DB plan each year to satisfy what's known as a minimum funding requirement. Due to the complexity of this calculation and other requirements, administration of a DB plan usually requires professional assistance.
  • Defined contribution plans -- With defined contribution (DC) plans, employers contribute into individual accounts for each employee. Employees may then be given the authority to invest the money as they see fit. DC plans do not require immediate vesting and may allow employee loans.
    • Profit sharing plan -- Employers can vary the amount and frequency of contributions based on fluctuating profits.
    • Money purchase pension plan -- Contributions are mandatory, and the percentage amount may not vary.
    • Paired plans -- Paired plans allow annual contributions to vary, but guarantee a minimum percentage. For 2017, employers can contribute the lesser of 25% of earned income or $55,000 to each participant's profit sharing plan, money purchase pension, or paired plan account.
    • 401(k) plans -- These popular DC plans allow employee contributions (or "elective deferrals"). In recent years, 401(k)-style plans have become less complex and less expensive for smaller businesses. Participants may contribute up to $18,500 for 2017, and employers may also contribute. Total contributions to an individual's account cannot exceed $55,000 or 100% of compensation, whichever is less.

As you review these retirement plan options, keep in mind there are many points to consider. You may want to evaluate your business's unique needs and goals, and limit your own fiduciary responsibility. For these reasons, it is generally advisable to speak with a retirement planning professional before making any decisions.

Withdrawals from retirement plans are subject to ordinary income tax treatment and if taken prior to age 59½ may be subject to an additional 10% federal income tax penalty.

This article has been written by and obtained from an outside source and is provided for general information purposes only. This material does not constitute an offer or solicitation of any kind and is not intended, and should not be relied upon, as investment, tax, legal, or financial advice or services.

Securities offered through AXA Advisors, LLC (NY, NY 212-314-4600), member FINRA, SIPC. Annuity and insurance products, including those issued by AXA Equitable Life Insurance Company (NY NY), offered through AXA Network, LLC, which conducts business in CA as AXA Network Insurance Agency of California, LLC, in UT as AXA Network Insurance Agency of Utah, LLC and in PR as AXA Network of Puerto Rico, Inc.

The retirement plan would be funded by an annuity contract issued and distributed by AXA Equitable Life Insurance Company (AXA Equitable), New York, NY. Annuities contain certain limitations and restrictions.

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© 2016 DST Systems, Inc. Reproduction in whole or in part prohibited, except by permission. All rights reserved. Not responsible for any errors or omissions. 

This information is provided for informational purposes only. We encourage you to seek personalized advice from qualified professionals regarding all personal finance issues. 

Please be advised that this document is not intended as legal or tax advice.  Accordingly, any tax information provided in this document is not intended or written to be used, and cannot be used, by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer.  The tax information was written to support the promotion or marketing of the transaction(s) or matter(s) addressed and you should seek advice based on your particular circumstances from an independent tax advisor.

AXA Equitable Life Insurance Company (New York, NY) issues life insurance and annuity products. Securities offered through AXA Advisors, LLC, member FINRA, SIPC.  AXA Equitable Life Insurance Company and AXA Advisors are affiliated and do not provide tax or legal advice.

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