1 CHOOSING A. RETIREMENT SOLUTION . FOR YOUR SMALL BUSINESS. CHOOSING a RETIREMENT SOLUTION for Your Small Business is a joint project of the Department of Labor's Employee Benefits Security Administration (EBSA) and the Internal Revenue Service. To view this and other EBSA publications, visit the agency's website. To order publications or speak with a benefits advisor, contact EBSA electronically. Or call toll free: 866 444 3272. This material will be made available in alternative format to persons with disabilities upon request: Voice phone: (202) 693 8664. TTY: (202) 501 3911. This booklet constitutes a small entity compliance guide for purposes of the Small Business Regulatory Enforcement Fairness Act of 1996.
2 It does not constitute legal, accounting, or other professional advice. Starting a RETIREMENT savings plan can be easier amount of the credit is based on the contributions than most business owners think. What's more, participants make and their credit rate. The there are many RETIREMENT programs that provide maximum contribution eligible for the credit tax advantages to both employers and employees. is $2,000. The credit rate can be as low as 10. percent or as high as 50 percent, depending on the Why Save? participant's adjusted gross income; and Experts estimate that Americans will need 70 to 90 A Roth program that can be added to a 401(k) plan percent of their preretirement income to maintain their to allow participants to make after-tax contributions current standard of living when they stop working.
3 Now into separate accounts, providing an additional way is the time for you and your employees to start planning to save for RETIREMENT . Distributions upon death for RETIREMENT . As an employer, you have an important or disability or after age 59 1/2 from Roth accounts role in helping America's workers save. held for 5 years, including earnings, are generally tax-free. By starting a RETIREMENT savings plan, you will help your employees save for their future. RETIREMENT plans may A Few RETIREMENT Facts also help you attract and retain qualified employees, and Most private-sector RETIREMENT vehicles are either they offer tax savings to your business. You will help Individual RETIREMENT Arrangements (IRAs), defined secure your own RETIREMENT as well.
4 You can establish a contribution plans, or defined benefit plans. plan even if you are self-employed. People tend to think of an IRA as something that Any Tax Advantages? individuals establish on their own, but an employer A RETIREMENT plan has significant tax advantages: can help its employees set up and fund their IRAs. With an IRA, the amount that an individual receives at Employer contributions are deductible from the RETIREMENT depends on the funding of the IRA and the employer's income, earnings (or losses) on those funds. Employee contributions (other than Roth contributions) are not taxed until distributed to the Defined contribution plans are employer-established employee, plans that do not promise a specific benefit at Money in the plan grows tax-free, and RETIREMENT .
5 Instead, employees or their employer (or Distributions may be eligible for tax-favored both) contribute to employees' individual accounts rollovers or transfers into other RETIREMENT programs. under the plan, sometimes at a set rate (such as 5. percent of salary annually). At RETIREMENT , an employee receives the accumulated contributions plus earnings Any Other Incentives? (or minus losses) on the invested contributions. It's easy to establish a RETIREMENT plan that benefits you, your business and your employees, and there are Defined benefit plans, on the other hand, promise a additional incentives for having a plan: specified benefit at RETIREMENT , for example, $1,000.
6 A month. The amount of the benefit is often based on High contribution limits so you and your employees a set percentage of pay multiplied by the number of can set aside large amounts for RETIREMENT ; years the employee worked for the employer offering Catch-up rules that allow employees age 50 and the plan. Employer contributions must be sufficient to over to set aside additional contributions. The catch fund promised benefits. up amount varies, depending on the type of plan;. A tax credit for small employers that enables them to Small businesses may choose to offer IRAs, defined claim a credit for part of the ordinary and necessary contribution plans, or defined benefit plans.
7 Many costs of starting a SEP, SIMPLE, or certain other financial institutions and RETIREMENT plan practitioners types of RETIREMENT plans (more on these later). The make available one or more of these RETIREMENT plans credit equals 50 percent of the cost to set up and that have been pre-approved by the IRS. administer the plan, up to a maximum of $500 per year for each of the first 3 years of the plan; On the following two pages you will find a chart A tax credit for certain low- and moderate-income outlining the advantages of each of the most popular individuals (including self-employed) who make types of IRA-based and defined contribution plans and contributions to their plans ( Saver's Credit ).
8 The an overview of a defined benefit plan. IRA-BASED PLANS DEFINED CONTRIBUTION PLANS DEFINED BENEFIT. PLANS. Payroll SEP SIMPLE IRA Plan Profit Sharing Safe Harbor 401(k) Automatic Enrollment Traditional 401(k). Deduction IRA 401(k). Easy to set up and maintain. Easy to set up and maintain. Salary reduction plan with little Permits employer to make large Permits high level of salary deferrals Provides high level of participation and Permits high level of salary deferrals by Provides a fixed, pre-established Key administrative paperwork. contributions for employees. by employees without annual permits high level of salary deferrals by employees. benefit for employees.
9 Advantage nondiscrimination testing. employees. Affords safe harbor relief for default investments. Any employer with one or more Any employer with one or Any employer with 100 or Any employer with one or more Any employer with one or more Any employer with one or more Any employer with one or more Any employer with one or more Employer employees. more employees. fewer employees that does employees. employees. employees. employees. employees. Eligibility not currently maintain another RETIREMENT plan. Arrange for employees to make May use IRS Form 5305- May use IRS Form 5304-SIMPLE No model form to establish this No model form to establish this plan. No model form to establish this plan.
10 No model form to establish this plan. No model form to establish this plan. Employer's payroll deduction contributions. SEP to set up the plan. No or 5305-SIMPLE to set up plan. May need advice from a May need advice from a financial May need advice from a financial May need advice from a financial Advice from a financial institution Role Transmit contributions for annual filing requirement for the plan. No annual filing financial institution or employee institution or employee benefit institution or employee benefit adviser. institution or employee benefit adviser. or employee benefit adviser would employees to IRA. No annual employer. requirement for employer. Bank benefit adviser.