Choosing a retirement plan for your business

1. IRA plans. These are individual retirement accounts (IRAs) that are set up for employees by the company. They are easy and inexpensive to set up and administer, so they are popular for small businesses. There are three kinds:

• Payroll Deduction IRA An account is set up for each employee who wants one, and the employer deducts the requested amount from the employee’s pay and deposits it into their account. With this type of plan, only the employee makes contributions. The maximum amount an employee can contribute in 2020 is $6,000, with an additional $1,000 ‘catch-up’ contribution allowed for employees age 50 and over. 
• Simplified Employee Pension (SEP) IRA With this type of plan, the employer contributes a percentage of each person’s salary into their plan account. The percentage must be the same for each employee in a given year, but can vary from year to year. So, if your company has a really good year and wants to reward its employees, it can contribute a larger percentage to their SEP IRAs. If business is slow in a certain year, the company can contribute less. The employer can contribute up to 25% of each employee’s compensation but no more than $57,000 per employee in 2020. Employees do not make contributions to SEP IRAs. 
• Savings Incentive Match Plan (SIMPLE) IRA Both employer and employee can contribute to this type of plan. Employees can make contributions through salary deduction of up to $13,500 in 2020, plus a $3,000 ‘catch-up’ contribution if you’re 50 or over. The employer must contribute to each employees’ account, whether the employee contributes or not. If the employee contributes, the company must match up to the first 3% of their salary, dollar for dollar. If the employee does not contribute, the company must contribute 2% of their salary. 

2. Defined contribution plans are designed to deposit a certain amount of money into the employee’s account. These plans tend to be used more often by bigger companies since they can be more complicated and costly to set up than IRA plans. You should seek the advice from a financial institution or employee benefit advisor to set up one of these plans. There are two basic types.

• Profit sharing plan This is an employer-funded plan that allows employers to contribute up to $57,000 to each employee’s account in 2020. These plans can have a vesting schedule, so that employer contributions become available over a period of years (usually five). Employees do not contribute. 
• 401(k) plan This type of plan accepts contributions from both employers and employees. Typically, the employee will contribute a percentage of their salary and the employer will match up to a certain percentage, so the more the employee contributes, the more the employer contributes. The combined contribution in 2020 is limited to $19,500, plus a $6,500 ‘catch-up’ contribution for those aged 50+.  

3. Defined benefit plans, commonly known as pensions. These are employer-funded plans that promise a certain amount of income to be paid out in retirement. They are rare and becoming rarer, as they represent an open-ended commitment on the part of the employer.