Selecting the right retirement plan for your small business can be daunting because of the many different types from which to choose. The good news is that because there are so many choices, it's possible to find one that exactly matches the needs of both you as the employer and business owner and your employees.
Big changes in retirement plans are racing ahead in Congress, but first we have to understand what's in place now for small businesses and their workers.
Most retirement plans fall under one of two categories: IRA-based type of plans and qualified retirement plans, which are regulated by the Employee Retirement Income Securities Act and have special provisions to maintain the tax benefits. The plan that would best suit your business will depend on factors such as whether you as an employer will want to contribute to participants' accounts, how much flexibility you want, whether you want to make the plan available to all of your employees and the nature and size of your business. For sole practitioners and smaller business owners who seek a plan that is simple to set up and easy to administer, consider an IRA-based plan such as a SEP-IRA or Simple IRA. A major difference between the two is how the contributions to the plan are made. With SEP-IRAs, the employer -- not the employees -- makes contributions, which are deductible to the business. An advantage of SEP-IRA plans is that contributions are discretionary. Although the contribution percentage must be consistent among every eligible employee, it can vary year to year from as little as 0% to up to 25% of compensation, provided that the total contribution to any one person does not exceed $49,000. With Simple IRAs, employers and employees contribute. Although employees' contributions are discretionary, up to $11,500, employers are required to match the deferral, up to 3% of the contributing employee's wages. Deciding between the types of plans will partly depend on whether you want to match deferral amounts as a benefit and savings incentive for your employees, or if you would prefer to have your employees fund their accounts on their own.