Small Business Corporate Retirement Plans

In today’s highly competitive recruiting and hiring environment—especially for small and mid-size employers—a retirement plan at work is an indispensable benefit that employees expect. A well-designed plan can help swing a prospective employee’s decision in your favor, and the cost and complexity of company-sponsored retirement plans is decreasing.

The IRS provides a start-up tax credit for some plans and employer contributions are deductible. Additionally, the 2020 SECURE Act created the Pooled Employer Plan 401(k) (“PEP”), which permits unrelated employers to join in a plan sponsored by a third party called a “Pooled Plan Provider.” Many investment firms offer PEP plans, significantly lowering costs and administration with virtually all the features of a traditional 401(k).

These company-sponsored retirement plans may be a fit for your organization.

SEP-IRA

SEP-IRA (Simplified Employee Pension) is a retirement plan for self-employed individuals and their employees. Employers are generally the sole contributors, but employees may also make traditional IRA contributions. Contributions are not required every year.

Employer Contributions

• An employer may contribute up to 25% of employee’s total compensation or a maximum of $61,000 (2022 tax year).
• For self-employed, contributions are generally limited to 20% of net income.
• Contributions must be the same for employers and employees up to the specified limit.

Employee Contributions

• Employees are unable to make salary deferral contributions; they may make Traditional IRA contributions up to $6,000 ($7,000 for employees aged 50 or older) for 2022.

Investment choices

Mutual funds, stocks, bonds, exchange-traded funds and money market funds.

401(k) / Profit Sharing Plan

A 401(k) is a plan in which a business sets aside a portion of its pre-tax profits to contribute to employees’ retirement accounts. Business owners typically contribute as a percentage of salary.

For 401(k) plans, the total annual contribution limit for 2022 is the lesser of $61,000 per employee ($67,500 for age 50 and older) or 100% of their salary.

Employer Contributions

• Because ERISA rules prevent discrimination toward non-highly compensated employees there are rules for matching contributions for highly compensated employees and owners. For this reason, most employers elect the option to make a 3% of salary “safe” harbor match” to all employees that simplifies plan testing and administration. Profit sharing in a 401(k) permits an employer to make additional contributions to each employee regardless of company profitability.

Employee Contributions

• Employees may contribute up to $20,500 in 2022. Employees aged 50 or older may contribute an additional $6,500 for a total of $27,000.
• Employees can make pre-tax or Roth (after-tax) contributions.

Investment choices

Typically stock and bond mutual funds including target date funds, exchange-traded funds, money market funds and guaranteed investment contracts (GIC).

SIMPLE IRA

A SIMPLE (Savings Incentive Match Plan for Employees) IRA is a retirement plan that allows employers and employees of any business with 100 or fewer employees to make tax-deferred contributions to their plan account.

Employer contribution limits

• Employer may make either a flat 2% of salary contribution or dollar-for dollar match of employee contributions up to 3%. This second option can be reduced to as low as 1% in any two of five years.
• Employee contributions are limited to $14,000 in 2022 ($17,000 for employees aged 50 and older).

Investment choices

SIMPLE plan investment choices are limited to mutual funds.

Individual 401(k)

Also known as SOLO 401(k) or i401(k), for self-employed business owners and spouses who are employed by the business. C corporations, S corporations, and LLCs with no common-law employees, may also establish an individual 401(k). Contributions can be from both employer and employee, significantly increasing the allowable contributions to employee accounts.

Employer contribution limits

• Employers can contribute up to 25% of compensation not to exceed $61,000 (for the 2022 tax year).
• Contributions are not required every year. When contributions are made, however, all participants must receive the same percentage.

Employee contribution limits

• Employees can defer up to $20,500 for 2022 ($27,000 for employees age 50 or older).
• Employees can make pre-tax or Roth (after-tax) contributions.

Investment choices

Same as traditional 401k plans.

If you are considering a company-sponsored retirement plan, consult with an experienced financial advisor to help provide sound advice and planning.