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How to Choose a Retirement Plan How to Choose a Retirement Plan Small Business Guidebook ADP SMALL BUSINESS GUIDEBOOK Your business is your passion. You’re doing what you love, and you’re in charge. While growing and developing your business may be your current priority, successful business owners are always looking to the future. Even if you plan to work forever, adding a retirement plan to your business is a smart move. Whether you’re looking to save for your own retirement, get big tax breaks or provide competitive benefits to your employees, retirement plans deliver some big advantages for small business owners. If you’re trying to make sense of how to save for your future as a business owner, this guide contains practical information about how to choose the right plan for you and your business. It doesn’t have to be complicated. Now let’s get started. 1 ADP Small Business Guidebook | How to Choose a Retirement Plan Contents Section 1 Section 6 Tax Benefits for You and Your Business Making Plan Administration Easy Section 2 Section 7 Workforce Rewards About Plan Administration Section 3 Section 8 Substantial Savings Potential Important Plan Dates Section 4 Section 9 Things to Keep in Mind Ask the Professionals Section 5 Section 10 Know Your Options Helpful Websites 2 ADP Small Business Guidebook | How to Choose a Retirement Plan Section 1 Tax Benefits for You and Your Business One of the most appealing things about retirement plans is the substantial savings opportunity they offer business owners and their employees. Some plans let you put almost $60,000 away annually for your future, and the tax advantages many plans offer help make them affordable. So, if you’ve gotten a late start at saving, and you’re interested in reducing taxes, a retirement plan is a smart way to do it. 3 ADP Small Business Guidebook | How to Choose a Retirement Plan Retirement Plan Tax Advantages Pre-Tax Contributions Some retirement plans allow you to save with before tax dollars, which can reduce your taxable income and result in savings on your federal income taxes. Business Tax Credits Your business may qualify for a business tax credit of up to $500 per year for the first three plan years to apply to plan start-up expenses. Qualified employers can offset 50% of the costs to establish the plan, up to $500 annually, for each of the plan’s first three years. Check with your tax adviser to see if you qualify for this credit. Tax Deductions on Employer Contributions You can use your business to fund your retirement when you make employer contributions, which are tax deductible as a business expense. 4 ADP Small Business Guidebook | How to Choose a Retirement Plan Section 2 Workforce Rewards If your business relies on employees to keep it humming, a benefits package with a retirement plan can help you hire and keep valued workers. 5 ADP Small Business Guidebook | How to Choose a Retirement Plan Attract and Retain Employees Today’s workers consider a retirement plan an essential part of an attractive benefits package. In fact, 8 out of 10 workers, when accepting a new position, view financial benefits like a retirement plan a key consideration.1 Build a better workforce Research finds that workers with retirement benefits: 1 Are more satisfied, engaged, loyal and productive.2 2 Save, and save more, than those who do not.3 Saving for Retirement $25,000+ Saved Satisfied Engaged Loyal Productive With Plan No Plan With Plan No Plan 91% 85% 75% 79% 90% 20% 60% 9% Financial benefits also encourage healthy turnover and can keep your workforce robust: when older employees are financially prepared, they can retire when they’re ready, which makes room for growth opportunities for other employees and adding fresh talent. 1 Bank of America Merrill Lynch Workplace Benefit Report, June 2012. 2 Bank of America Merrill Lynch Workplace Benefit Report, April 2015. 3 The 2015 Retirement Confidence Survey, Employee Benefit Research Institute (EBRI), April 2015. 6 ADP Small Business Guidebook | How to Choose a Retirement Plan Section 3 Substantial Savings Potential Putting money aside for the future can help you afford the retirement you want, when you’re ready. Retirement plans with high savings limits can help you reach your goals. 7 ADP Small Business Guidebook | How to Choose a Retirement Plan A Solid Plan If you’re banking on using your business to fund your retirement, you could be making a big mistake: • Many workers retire sooner than planned — often due to the unexpected, like health problems.1 • Your business may become your biggest asset, but to sell it when you’re ready to retire, you’ll need a buyer — and market conditions could influence its value. This means your business could be worth less than you’d hoped, or you’ll need to put off retiring until you are able to sell. Even if you love what you do and want to keep doing it, or you plan to use the sale of your business to fund your retirement years, it’s essential to back that plan up with savings. Money you save gives you freedom — to retire when you’re ready, and on your own terms. 1 The 2015 Retirement Confidence Survey, Employee Benefit Research Institute (EBRI), April 2015. 8 ADP Small Business Guidebook | How to Choose a Retirement Plan Section 4 Things to Keep in Mind First, let’s think about the main purpose for the retirement plan. Do you want to offer better benefits to attract talent and keep your existing employees happy? Or maybe you’re concerned about your financial future and are looking for the best way to save. Whatever the reason, there’s a plan that can meet your goals and budget. 9 ADP Small Business Guidebook | How to Choose a Retirement Plan Most business owners add a retirement plan to their benefits package for one or more of the following reasons. Why do you want one? Save for your own retirement Capitalize on tax breaks Offer more competitive benefits to employees All of the above Your income, the size of your business, and certain preferences are also important considerations in your decision: Your self-employment income The size of your business Your preferences for funding the plan (with employee or employer money, or both) Your retirement savings goals Your interest in providing retirement benefits to employees Your ability to manage plan administration and maintenance 10 ADP Small Business Guidebook | How to Choose a Retirement Plan Section 5 Know Your Options The most popular types of small business retirement plans include SIMPLE IRA, SEP IRA and small business 401(k) plan. When deciding which is right for your business, consider your business size, your self-employment income, and your preferences regarding plan, such as high contributions or simple administration. 11 ADP Small Business Guidebook | How to Choose a Retirement Plan Decide which is right for you. Simplified Employee Pension Individual SIMPLE IRA Plan Retirement Accounts (SEP IRA) Savings Incentive Match Plan for Employees or SIMPLE Employers can set up a SEP IRA for themselves and IRA is specifically designed for small businesses. While each of their employees. With a SEP, only employers businesses with as many as 100 employees may use can contribute money to the plan, and it must be an a SIMPLE IRA for their retirement plan solution, it is equal percentage for each employee. SEP IRAs are typically used by small businesses with less than 10 flexible — the employer contribution can change each employees. It allows both employers and employees year, which is a plus if your business has inconsistent to put money in the plan (contributions). Employees cash flow. A SEP IRA allows you to save at a substantial can contribute a percentage of their salary to their amount, and it’s easy to set up and administer. But, accounts and choose how the money is invested, for businesses with many employees, the employer and the employer is required to make an annual contributions of a SEP can be costly. matching contribution. Due to mandatory employer contributions, SIMPLE plans are free of Department of Labor testing requirements. These plans are typically Want more details? Visit the IRS website for resources and low cost, and easy to set up and administer. information about SEP IRA plans. More information about SIMPLE plans can be found on the IRS website. 12 ADP Small Business Guidebook | How to Choose a Retirement Plan Small Business 401(k) Plan Almost any type of employer can establish a 401(k) plan by the Internal Revenue Code to ensure that a plan — sole proprietors, partnerships, LLCs, corporations and does not benefit owners and other highly compensated even tax-exempt employers. To receive qualified-plan tax employees too much more than the plan benefits other treatment, the employer (who is the plan sponsor) must employees. The Actual Deferral Percentage (ADP) adopt a plan document which specifies everything that’s and Actual Contribution Percentage (ACP) tests must necessary to meet every condition in Internal Revenue be passed in order to satisfy these non-discrimination Code section 401(a). All service providers make available requirements for the plan to get tax-qualified treatment. preapproved documents to make meeting these There are other non-discrimination tests that must requirements easy. be met for a plan to meet Internal Revenue Code requirements, but these are the primary ones. A 401(k) plan offers greater choices in plan design. For example, employers usually can determine eligibility If a plan fails either test, the employer must take based on employee age and service.
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