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Most people know of the qualified retirement plan options available at large corporations
Generally you hear about a company 'sponsoring' a plan and providing a dollar match up to a stated percentage. Large companies love to implement these plans because of the size of their employee groups. The larger the company the cheaper these plans are for them to offer as economies of scale widen.
Retirement plan solutions for smaller to medium sized firms are sometimes more complex than large C-corps due to the employee size, structure of firms, or revenue differences. These intricacies of smaller businesses create headaches for business owners or at least indecision about what types of plans work best given their circumstances.
As business owners, we understand the struggle for bandwidth between maintaining your ongoing business and setting up employee benefit/retirement plans. The battle is between spending your time focusing on growing revenue and spending time focusing on the structure and hierarchy of your business and its benefits, but really these two issues should not be inversely related! Deciding on your business’s retirement plan and how that plan could benefit your employee base should directly help your top line, as you retain and motivate your employee base.
The retirement plan solutions for small employers can feel overwhelming to implement but in a world where competition for the top talent is heating up they are becoming mandatory for the continuity of small business. Below we describe plans more suitable for companies with less than approximately 50 employees. Be sure to reference the IRS webpage for full guidelines, contribution limits, and tax implications of creating each plan.
Click to expand the following lists:
Savings Incentive Match Plan for Employees - similar to a 401k but structured for small businesses where they don’t have to undergo hefty plan administration costs of a true 401k plan (401k plans have costs for the company to start them up, maintain, and make sure they’re meeting the ERISA guidelines each year). SIMPLE plans help smaller companies save overhead and therefore help out their employees in a greater manner; although it should be noted that the contribution limits of SIMPLE plans are less than a 401k plan, meaning you can’t put as much money into the account each year.
Self - Employed Pension plan - just as the acronym describes are for self-employed individuals and/or businesses with only a handful of employees (although there is no limitation). SEP's generally begin with the owner deciding how much income they want to defer into retirement. Then the owner, under ERISA guidelines, is required to make the same percentage contribution for eligible employees. SEP’s usually have the highest contribution rates; up to 25% of compensation or $58,000 per year whichever is less.
Solo (k) plans are for business with one employee and one owner who are the same person hence the term Solo. These businesses choose a solo K over a SEP most of the time because of the way their business is incorporated, generally S corporation status. The owner/ employee can defer up to $19,500 per year into the 401k, and have the company match up to a maximum of $57,000. These plans are easily converted to 401k plans upon adding additional employees/workforce.
If the contribution limitations of SEP/401k/ SIMPLE plans don't seem like enough money to save for retirement, then this is where a deferred compensation plan can provide a solution. Deferred comp plans are non-qualified meaning they do not have to operate under ERISA guidelines. They allow key employees to defer large portions of their bonuses, income, and sometimes stock into retirement. These plans are designed to either help with a tax burden now, in the future, or just help provide a greater level of compensation to key employees motivating them to keep working (golden handcuffs).
Qualified Annuities - Annuities are investments that convert a lump some of cash into an income stream over time. Annuities in this case are written in tandem with a life insurance policy. These policies can provide a lifetime of income if the insured lives, and also provide a death benefit if they perish. The annuity grows tax-deferred in the same way a traditional IRA works.
Permanent Insurance - differs from term insurance because it accrues cash value, which is the portion of the policy that is tied to an investment account. These cash values grow over time and can eventually be used as collateral, to provide income through policy loans, or surrender for a payout. The cash value portion of permanent insurance is often used as a retirement benefit of small employers.
3rd-party financed indexed universal life insurance - these insurance plans actually enable a 3rd party (bank or lender) to fund the annual premium payment of insurance. The employee or business owner in this case would be the insured. These policies enable businesses to structure buyouts from key executives by utilizing the cash value on the policy, or award the policy to employees as an added benefit. While complex, these plans can provide huge retirement savings if utilized properly and we’d love to chat with you if you have questions.
At Harvest Investment Strategies, we are a small business faced with the same decisions as you. Because we know first hand the necessity of retirement plan solutions, we hope to assist you in your small business endeavors. Whether you need advice on retirement plans, personal recommendations on contribution optimizations and 401k allocations, or someone to oversee a plan your business has already implemented we would be glad to be your trusted resource.
If this Acorns article has caused you to ponder if your current business situation is sound, we’d enjoy the opportunity to analyze it for you. Our priority is making sure you have confidence in the process. We would love to hear your thoughts on these points and hope you’ll reach out to us for further discussion.
Jared joined H.I.S. in May of 2013 after graduating with a BA in Personal Financial Planning/Risk Management from the University of Central Arkansas (summa cum laude). He is a financial advisor and partner at HIS.
Will joined H.I.S. in April of 2022 after beginning his career at Edward Jones. Prior to working in the securities industry, Will graduated from Ouachita Baptist University in 2019. At Quachita Baptist will received his BA in Finance...