An Overview of Small Business Pension Plan Options
There are six small business pension plan structures that are recognized by the IRS. For
more information about any of these plans, search for publications on the IRS website.
Here is an overview of the six plan structures.
Simplified Employee Pension Plan - SEP
Using a mutual fund company, brokerage firm, bank or other institution, you or your
employee open an IRA account. This option must be made available to all full and part-
time employees in the company. You, the employer, can make a yearly contribution to
each employee's account up to $41,000 - based on a maximum contribution of 25% of
the employee's total compensation, up to $205,000. The employee can contribute to his
or her personal account up to the current, standard IRA maximum. The employer is not
required to make any specific contribution each year.
Profit Sharing
Using a tailored plan written by an outside administrator, or a packaged plan provided
by a mutual fund, bank, brokerage firm, etc., accounts are established for all employees
of your company. Employer contributions can be made yearly. Contributions of up to
100% of an employee's compensation can be earmarked for the account. Contributions
can be calculated on compensation up to $205,000, and the maximum contribution is
$41,000. Only the employer can contribute to a profit sharing account. Employees
cannot make contributions. A profit sharing plan is often paired with a SEP or 401K to
create an optimized small business pension plan that allows both employers and
employees to contribute the maximum contribution possible.
Money Purchase Plan
This plan is very similar to the basic Profit Sharing plan, described above, but
contributions are not tied to profits. Instead, the contribution level is fixed, whether
profits are good or bad. This pension structure still exists, but has essentially become
obsolete. A more attractive program can be created using a Profit Sharing plan
combined with a SEP or 401K plan.
401K Plan
Using a tailored plan written by an outside administrator, or a packaged plan provided
by a mutual fund, bank, brokerage firm, etc., accounts are established for all employees
of your company that choose to participate. Employees can contribute up to $14,000 of
their pre-tax salary, and employees over 50 can make an additional "catch-up"
contribution of $4,000 per year. The employer can choose to match any portion, up to
the full yearly contribution, made by their employees.
Savings Incentive Match Plan for Employees - SIMPLE
This plan is only available to companies with 100 or fewer employees. The SIMPLE
IRA or 401K is designed to be easy for a small employer to implement without outside
assistance. Visit the IRS website to download plan instructions and forms. Employees
can contribute a maximum of $9,000 of their yearly salary to a SIMPLE IRA of 401K,
and eligible employees can also make a maximum catch-up contribution of $1500.
Employers must contribute a matching contribution of at least 1% and no more than
3%.
Defined Benefit Pension Plan
Following a written plan developed by an administrator, pension accounts are
established for all employees in the company. The employer then makes quarterly
contributions to each account, based on an actuarial formula. These installment
contributions are subject to federally imposed funding requirements. The long-term,
accrued contribution by the employer is calculated to provide a benefit that is either
100% of the employees' average salary (up to $205,000) for the employees' three,
consecutive top-earnings calendar years; or, a maximum of $165,000.
Keep in mind that your company can implement two or more plans in order to create an
economical and attractive small business pension plan, which will help you be
competitive in the search for top-tier employees.
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