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MICHAEL J. DONNELLAN King Financial, Inc.
SMALL BUSINESS RETIREMENT PLANS
Employee benefits play an important role in the lives of employees as well as their families. For that reason, the benefits you offer can be a deciding factor for a potential employee’s decision to work at your business.
There are two types of employee benefits: (1) those the employer must provide by law; and (2) those the employer offers as an option to compensate employees. Examples of required benefits include social security and workers’ compensation, while optional benefits include health care insurance coverage and retirement benefits. Both required and optional benefits have legal and tax implications for the employer.
I typically recommend a 401(k) Plan for businesses with over 50 employees. If your business has less than 25 employees you should consider other available options, which can give you more flexibility along with a lower cost and less paperwork and administration. SEP PLAN A SEP is specifically designed for self-employed people and small business owners who typically employ fewer than 25 employees. This plan is great for self-employed individuals with no other employees or small businesses with employees who meet certain compensation and tenure requirements.
Generally, clients choose a SEP Plan if they are looking for flexibility in their contribution percentage. In fact, the business owner decides each year whether, and how much, to contribute to employees’ SEP-IRAs. Employees do not make contributions through the plan, but they can make contributions on their own into their own IRA. continued on page 14
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Contribution limits are 25% of compensation or up to $57,000 for 2020.
SEPs require the company to make allocations proportional to your eligible employees’ salary/wages. This means that everyone’s contribution is the same percentage of salary. Exceptions may include employees who have worked for the company for less than three of the past five years, those under 21 years old and those who have been paid less than $600 in compensation.
SIMPLE PLAN A Savings Incentive Match Plan for Employees (SIMPLE) is designed for small businesses with fewer than 100 employees. The plan is funded by employer contributions and can also be funded by elective employee salary deferral. SIMPLE Plans are largely funded by employee contributions, but limited employer contributions are required. Contribution limits for 2020 are $13,500 for those under 50 years old and a catch-up provision of an additional $3,000 for ages 50 and over.
The plan requires a certain minimum contribution from the employer. The employer may either match the contributions of employees dollar for dollar up to 3% of the employee’s compensation or the employer may contribute a flat 2% of compensation for each employee with at least $5,000 in compensation for the year, regardless of the amount the employee contributes.
SELF EMPLOYED 401(K) Another option would be a Solo 401(k) or Self Employed 401(k). These are designed for a self-employed individual or business owner with no other employees other than a spouse. The contribution limits are even higher as the employee can contribute up to $19,500 in 2020 in addition to the company 25% max. Total employer/employee contributions cannot exceed $57,000.
Generally, these retirement plans offer tax-deductiblity for contributions and the earnings grow tax-deferred. Participants direct their own investments within different asset classes, most of the time within a family of mutual funds.
More information can be found at the Small Business Administration’s website at www.sba.gov.
Discuss your options with tax and financial professionals. If you would like a free consultation regarding your current plan or if you are looking to establish a new plan, feel free to call.
Michael J. Donnellan specializes in stock selection and retirement planning. Contact him with any questions or comments at the M3 Wealth Management office at: 17601 W. 130th Street – Suite 1 in North Royalton, Ohio. Phone number (440) 652-6370 Email: donnellan@m3wealthmanagement.com
Securities & advisory services offered through L.M. Kohn & Company Registered Broker/Dealer Member FINRA/SIPC/MSRB 10151 Carver Rd. Suite 100 – Cincinnati, Ohio 45242 (800) 478-0788
The M3 Wealth Management Office does not provide legal or tax advice. Consult an attorney or tax professional regarding your specific situation. The information herein is general and educational in nature and should not be considered legal or tax advice.
Scenarios illustrated are hypothetical in nature, results may vary. Investing is subject to risk which may involve loss of principal. Past performance is not indicative of future results.
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