Why should you consider a retirement plan for your business? First — and perhaps most important — is that the tax benefits can help you save more for yourself. Your contributions can help reduce current income taxes now, while your retirement plan account can potentially grow and compound tax-deferred. Second, it helps you attract and retain employees. Small businesses like yours typically offer less comprehensive benefits than larger companies, yet you share many of the same challenges. That can hurt your ability to attract and retain qualified employees. Finally, a retirement plan helps you reward your employees by helping them prepare for their own futures.
Here are your basic retirement plan options — SEP IRAs, SIMPLE IRAs, profit sharing plans, and 401(k)s. All of these plans offer you not only the personal benefits of saving for retirement, but business advantages too.
The Pension Protection Act (PPA) of 2006 included a long list of tax and other benefits to encourage the use of 401(k) and other plans that are common in small businesses. For instance, the law provides for simplified tax filing requirements for sole proprietors and small businesses with fewer than 25 employees who use 401(k) plans. The PPA also included a provision to allow employers to auto-enroll employees in a defined contribution plan. If an employer uses auto-enrollment and meets certain standards for contributions by employers and employees, they can generally qualify for guaranteed nondiscrimination status. In this way, auto enrollment provides a simplified way to comply with those tests. The PPA also made permanent many of the provisions in an earlier tax package that were scheduled to “sunset” in 2010. Specifically, the deduction limit for retirement plan contributions increased from 15% to 25% of eligible compensation. Other “permanent” benefits include the ability of businesses with 100 or fewer employees to deduct 50% of retirement plan start-up costs, up to $500, in each of a plan’s first three years.
This information was developed as a general guide to educate plan sponsors, but is not intended as authoritative guidance or tax or legal advice. Each plan has unique requirements, and you should consult your attorney or tax advisor for guidance on your specific situation. In no way does advisor assure that, by using the information provided, plan sponsor will be in compliance with ERISA regulations.