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Common Retirement Plans For Small Business Owners

Your business owner clients have many options when establishing retirement plans. Several key factors, specific to each client’s unique situation, must be considered in order to select the appropriate plan or combination of plans.

To help differentiate between the most commonly adopted retirement plans, we have created this chart. You can use this guide when comparing plan options and discussing your client’s goals regarding:

  • Maximizing retirement savings

  • Incentivizing employees

  • Managing costs and administrative complexity

  • Optimizing income tax planning

To frame a comprehensive discussion with your business owner clients, consider pairing this with the “Common Pension Plans For Small Business Owners” guide.


Hi, Todd Pouliot, Gateway Financial. Feel free to visit us at Got something a little different today. Normally we do our flow charts and our checklist and kind of work through some logic statements and kind of get to the end of the workflow or checklist with an answer. But today, we're going to come up with something a little bit different. Obviously, this year we have seen the economic struggle, we've seen the market struggle, we've seen inflation at a very hot pace – and one of the things that I love to do because I am one is to work with small business owners. And, small business owners are still the backbone of this country, most people are employed by small businesses, and I really love helping small business owners achieve their goals along with their employees. Because having an employee retire with dignity and staying retired with dignity is very important. Just like my employees to me, they're family and that's one of the things that I think all small business owners, in general, have a quest or a reason why is to do well for others. So, I have a kind of a graph today for you or a little chart that I'd like to go through talking about small business retirement plans. And, there are several key factors we need to consider to select the appropriate plan for contributions to a retirement plan. And, we want to go through four major areas today and those major areas are maximizing retirement savings, incentivizing employees, managing cost and administrative complexities, and optimizing tax planning. Boy, it seems like tax planning has become the favorite word of the last several videos. Now, I am going to talk about certain retirement plans today. I'm not going to discuss all of the options available to you. We do have some common pension plans that that's a separate guide we'll make a video on that but we just want to talk about common ones, not necessarily some particular ones that might be geared in certain situations. So, as I always do, I'm going to come over, I'm going to share our screen with you and we're going to talk about common retirement plans. So, there are different ones, we're not going to really get into all those and we can talk about those on a per-client basis. But today, let's talk about a solo 401K, a safe harbor 401K, more of a traditional 401K profit sharing plan, a SIMPLE IRA, and a SEP IRA. And, I'm familiar with all of these but they all mean different things. I personally, in my business, had a SEP IRA years ago we used to take small companies. When I say small probably, micro might be a better word – under 100 employees we would switch them into simple IRAs just for cost issues. And again, that was in the past. Profit-sharing plans are wonderful for companies that really want to do well for their employees. Traditional 401K, I'm not going to spend a whole lot of time on but we'll cover that. Safe Harbor 401K plans are wonderful for low administration efforts. And, solo 401ks, we're seeing a huge boom in solo 401ks. Why? Because who is eligible for that plan? A business owner or self-employed individual with no employees. So, we're seeing a huge boom in this because of COVID. The pandemic allowed people to start their own businesses. And the spouse, you can also include a spouse on your solo 401K. So, who can get involved with that solo 401K? Self-employed individual and the spouse who's active in the business. So, what would be considered a co-owner that is active in the business? And, how much can you put in? Typically, as I get later on in this guide, you'll notice there are some limitations, but the lesser of 100 percent of earned income up to twenty thousand five hundred dollars with that sixty-five hundred dollar catchup. Again, this is for 2022, we'll probably have a quick update on this chart shortly for 2023 with some increased amounts. And, how much can an employer contribute? The employer has full discretion over whether to contribute or not. That is a big part of the solo 401K. People always forget about the difference between the employer and the employee. And, what is the aggregate annual contribution limit? So, that is the employer and employee remember this is why solo 401k and having a side hustle that may have started as a hobby, can move into a wonderful tax planning opportunity that number is 61,000 dollars or 67,500 with the catch-up but it can exceed 25 percent of the gross income for a corporation and 20 percent of net income for a sole proprietor or partnership. This box right here is such a wonderful box it really gets people enthused and it gets their entrepreneurial juices flowing if they say, “How can I do this on my own?” That sixty-one thousand dollars is a heck of a jump from these twenty thousand five hundred that you see in these other 401K plans. And again, Safe Harbor, who can contribute? Eligible employees age 21 and over, at least one year of service if they're 100 vested. That Safe Harbor plan again has some limitations of twenty thousand five hundred. And, the employer must either make a non-elected three percent of participants' compensation or match participant deferrals up to four percent of their compensation. Now, we see a lot of safe harbors here. We see safe harbors used quite a bit and the majority of them – what they're going to do is they're just going to take that three percent participant, in general. Now everybody's plan is different. And again, we see these on really good plans, small businesses, typically under 50 employees. And, these are wonderful for companies that want to be paternal in how they treat their employees. Wonderful plan and it's very easy to operate it takes care of a lot of the testing on the back end and that's a wonderful job that the Safe Harbor plan can do. And guess what, you can also do up to that sixty-one thousand dollars – up to 100 percent with that catchup, so there's a lot of rules. And again, I'm gonna play up here at a very high level and not get into detail today because we only have so much time in this video and we don't want to bore you with all the details. There are a lot of rules and considerations when setting up a small business plan. Hopefully, you'll contact us directly after you view this video. Traditional employee 401ks, are non-Safe Harbor. The employer has full discretion on whether to contribute or not. That's the big change from the safe harbor to the full discretion on matching. We saw back in 08/09 when the economy was – during the credit crisis companies were just stopping their 401K matches period. And, we're going to probably see that as we saw the pandemic happen. So, we knew that was coming again, and hopefully, they're back to discretion and saying, “Yes, we are going to contribute.” And again, that sixty-one thousand dollar compensation limit. For profit sharing, the participants cannot contribute to this plan. That's the big deal with defined contribution. Typically it's the employees that are contributing. In the profit-sharing plan, the participants cannot contribute at all the employer has the full discretion whether to contribute or not. And again, it's up to 25 percent of the participant's compensation. These are wonderful planning tools for very small businesses. Typically, you'll have a small business, let's say it's a small law firm made up of five employees and four of them are partners, you'll see that profit-sharing plan. And again, that sixty-one thousand dollar limit. So, SIMPLE IRAs, we used to say we really went with this. You cannot use this over a hundred, so under a hundred, we used to use this because it was much less expensive. However, I will say it acts very similar to an IRA, but it is much more administrative work now. And that used to be a cheap avenue, but a lot of the solo 401K, Safe Harbor, and 401K plans have really come down in pricing the cost of dropped tremendously. The insurance companies used to dominate that landscape, now there are fintech firms that are doing it at a much cheaper price overall and doing well at it. Their automations – their systems are doing very very well. Employees who earned at least five thousand in the prior two years are expected to earn up to five thousand dollars this year. These SIMPLE plans were meant for transitory workers sometimes and it just is very easy I like how they use the word SIMPLE IRA to define it. And again, about fourteen thousand dollars is the limit for 2022 again there's a little catchup. And, one of the things that we saw with SIMPLE plans were small business owners who couldn't contribute a lot, that didn't want to go for twenty thousand or sixty-one thousand dollars, they only wanted to contribute small amounts we would see in this simple IRA. Here is the caveat here on how much an employer can contribute. Must either make a non-elective contribution of two percent. Boy, that sounds really similar to that Safe Harbor at three percent. Or, match participant deferrals up to three percent and that's kind of like that participant deferrals over here with the Safe Harbor. The SIMPLE is a smaller version of the Safe Harbor plan in my opinion. Yes, there are different rules but that's an easy way to remember that. And again, the compensation may be reduced to one percent during two of the five-year periods. We saw this happen with small startup businesses – didn't know what they could do – couldn't afford a lot and the owners were not making a lot in assets and could not save a lot and that's why we saw this be effective for many many years. So the aggregate is the sum of the maximum employer and participant contributions that we listed above here. So that is fourteen thousand plus those compensation percentages. A SEP IRA is very elusive, we don't see it often but it can be a wonderful tax play again. So, these are typically again, very small – very small companies that we see. Service three of the prior five years earning at least 650 dollars. Very small employers typically. Cannot contribute to this plan. Participants cannot contribute just like in the profit-sharing plan and the employer has full discretion on whether or not to make a uniform percentage of payments to all participants. This is the big hang-up most people have with that SEP IRA. When it works, it works wonderfully, but when it doesn't work is when you say, “Hey, I want to contribute 20 percent of my income to a SEP IRA for a tax advantage play.” But, if you have multiple employees, there will also be 20 percent for all the employees. That's why a very good micro business – again, we see that a lot of attorneys can do this – a solo practitioner attorney can do this. The compensation is the lesser of 25,000 – or 25 percent excuse me, or sixty-one thousand for self-employed. So hopefully, I've given you just a grid of some of the common plans for small business owners. Why did I bring you this today? I brought this up today because there are a lot of people, since the pandemic started in 2020, that are looking to start their own small businesses and don't really know what to do. So there you – these are just the common ones, hopefully, in the future, we'll bring you a video that talks about a little bit more detailed versions, massive tax savings, defined benefit, and defined contribution and cash balance plans, and all those wonderful things that we like to talk about. And, there are more details here that I can talk to you about loans being permitted. Can you take loans? Is it subject to annual testing? Yes here, because we need to make sure that test is here in 401ks, where we don't in the safe harbor because you've taken care of that safe harbor deferral taken care of that annual testing for you. Are contributions vested? In the solo plan, yes, you want it to be vested. Yes, in the SIMPLE, that is one of the downsides for the SIMPLE IRA versus that Safe Harbor and SEP IRAs. The vesting schedule comes in for profit sharing and the vesting schedule for 401k and safe harbor. Those vesting schedules are meant to keep people around. We're not seeing them as long as they used to be. When's the deadline? Last employer's taxable year. Make sure you understand that the taxable year does not always equal the end of year 12/31. We're seeing more and more corporations and tax preparers choosing 12/31 so it's not as confusing. But the SIMPLE IRA’s October 1st income tax filing deadline for extensions on that SEP and same as the profit-sharing plan because you don't know how much profit you're going to have in that profit-sharing plan. When is the deadline for funding employer contributions? Income tax filing deadline including extensions. Again, don't forget about the DOL rules. Understand DOL is very powerful and will learn to shut you down – the penalties are expensive, so understand what those rules are. And then this is the big one. The 5500 – E-fast is one of the places I go. This 5500 is posted there, it's public information. It's the tax return for the 401K or the small business retirement plan. So yes, you do need to file a 5500 if your plan is above 250,000. That's the area why people like the solo 401K because they don't have to do a 5500 till they get there. Usually, that takes a few years when you're a small startup solo 401K. Safe Harbor, yes, 401K, yes, profit sharing, yes, SIMPLE, no. And that's some of the reasons, maybe one of the best reasons why people choose a SIMPLE, is they don't want to have to deal with that Form 5500 and it is expensive to file sometimes and then also to get audited. Are participants permitted to withdraw from this plan? This is another very strong position I have. I don't like 401K loans. We have hardship withdraws for a reason. 401K loans, sometimes, not always, I see them used as savings accounts, and when Christmas rolls around people borrow against their 401K. Remember you can borrow money for education – you can borrow money for various reasons but you cannot borrow money for a retirement plan. So, I tend to be a little bit harsh – a little bit cowboy on some of these things but withdraws are not permitted until 59 and a half or separation from service. Again, if you're separating of service from your own business let's consider why we're doing that. Again, don't forget that 10 percent penalty, that's the same rules that we're going to have for all three; the solo, the Safe Harbor, and the more traditional 401k. Down into the profit sharing. Withdraws are permitted but subject to income tax and possibly the penalty if you do that before your dates. SIMPLE IRA, same possible 10 percent penalty. In the SIMPLE IRA, a major negative is a 25 percent penalty if it's within the first two years. That is a major tax penalty if you do that. That's why it's very very touchy to open up a SIMPLE IRA with a new business that doesn't know if they're going to make it or not. And, withdrawals are permitted but they are subject to income tax and a possible 10 penalty in the SEP IRA. Can this plan offer a Roth? You always hear me talk about HSAs, they're my favorite thing, triple taxation. Probably a close second is the Roth. Can I get in a Roth? And, I really want to push this because the 2017 tax cuts and jobs act is going to sunset in 2025, so we have a very narrow window to utilize lower tax rates now. Again, please consult your CPA or enrolled agent or whoever is used for tax advice. Everybody's tax situation is different, but for the majority of our clients, we are telling them this may be a great idea to use right now. Roth program; solo 401K yes, Safe Harbor 401K yes, traditional 401K yes. Profit sharing plan, SIMPLE IRA, SEP IRA, no, no, and no. So, understand tax preparation is done by looking backward, and tax planning is done to look forwards. This is where we really want to sit and say, “What does our future look like?” Not only today, not only within five years but even in the future, and possible retirement withdrawal and cash flow in retirement. That play can be absolutely critical to your personal financial plan and also your business in deciding what type of retirement plan you want to utilize for your business. So again, take note of the Secure Act, section 112 on long-term and part-time employees, section 401(a). I got to give it to my brother-in-law Tim. I'm just going to put a little shout-out to him. He's a third-party administrator on some plans. Always talk to me about 401(a) and keeping compliant with that. We want to make sure we're there. And, make sure you follow up with us we want to make sure you have the right 401(k) plan. Again, we're fee-only, fiduciary, and fully independent and we're here to help you. Thank you so much again for coming back. Hit that thumbs-up button. Hit the subscribe button. Ring the bell so we can bring you great videos and hopefully, we'll get you educated on not only these small business retirement plans but on many many other resources as well. Thank you, have a great day, and be well.

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