Choosing a Retirement Plan for Your Business

Why Have a Retirement Plan?

A retirement plan established through your business enables tax-advantaged savings for retirement, whether you’re self-employed or have employees. Such plans can reduce business taxes while helping attract and retain quality staff.

Three primary retirement vehicle categories exist: Individual Retirement Arrangements (IRAs), defined contribution plans, and defined benefit plans.

IRA-Based Plans

Payroll Deduction IRA Plan

Employers can facilitate employee IRA contributions through payroll deductions without establishing a formal retirement plan. This approach requires no IRS forms and offers immediate 100% vesting. Employees maintain full control over contribution amounts, with 2024 limits at $7,000 ($8,000 for those 50+). The employer bears no fiduciary responsibility since employees manage their own accounts. However, this option may lack appeal as an employee retention tool.

SEP (Simplified Employee Pension) IRA Plan

Sole proprietors, partnerships, and corporations can establish SEP plans where employers contribute to individual IRAs for themselves and employees. Only employers contribute, though contributions remain optional annually. Contributions cannot exceed 25% of compensation or $69,000 (2024). Self-employed individuals generally contribute up to 20% of net income per IRS calculations.

Setup requires minimal paperwork — a two-page form — with no annual filing obligations. However, employers must offer SEPs to all employees aged 21+ with three years’ tenure and $750+ annual compensation. Loans are prohibited, though withdrawals follow standard tax rules.

SIMPLE IRA Plan

Designed for organizations with 100 or fewer employees, SIMPLE plans allow employer contributions without maintaining other retirement plans. Unlike other options, SIMPLE plans mandate employer matching: either dollar-for-dollar matching up to 3% of salary or a fixed 2% contribution for all eligible employees.

Employee contributions reach $16,000 annually ($19,500 for those 50+). Setup uses standard IRS forms with minimal administrative burden. Plans don’t require discrimination testing, vesting schedules, or complex tax reporting. Employees direct their own investments and retain accounts upon job changes. Matching contributions vest immediately.

Defined Contribution Plans

Profit Sharing Plans

Any employer with one or more employees can establish profit-sharing plans with discretionary annual contributions up to 100% of compensation or $69,000 (2024). No mandatory contribution formula exists, though a set allocation method is required when contributions occur.

These plans demand separate accounting per employee and may require annual IRS Form 5500 filing. Vesting schedules may apply. Withdrawals follow specified triggering events and face federal income taxation. Plans may permit loans and hardship withdrawals, with early distributions subject to additional penalties.

Safe Harbor 401(k) Plans

These plans benefit businesses with highly compensated employees by permitting substantial salary deferrals without discrimination testing. Mandatory employer contributions — either specified matching or a 3% contribution to all participants — vest immediately at 100%.

For 2024, employees contribute up to $23,000 ($30,500 for those 50+), with combined contributions reaching $69,000. Annual Form 5500 filing applies to employers.

401(k) Plans – Traditional or Automatic Enrollment

The most widely adopted small-business retirement vehicle, 401(k) plans allow salary deferrals on pretax or Roth after-tax bases. Many financial institutions offer pre-approved plans, reducing administrative complexity.

Employers typically offer matching or additional contributions with graduated vesting. Employee deferrals vest immediately; employer contributions follow plan terms. Annual nondiscrimination testing ensures plans don’t favor highly compensated employees.

Beginning January 1, 2025, organizations must implement automatic enrollment with opt-out provisions. Default contribution rates may increase incrementally. For 2024, contribution limits match safe harbor plans: $23,000 individual/$30,500 for those 50+, with combined maximums of $69,000.

Defined Benefit Plans

Defined benefit plans guarantee fixed retirement benefits — for example, "$1,000 monthly" — typically based on compensation percentages multiplied by service years. Employers contribute sufficient amounts to fund promised benefits.

These plans allow greater annual contributions and tax deductions than defined contribution alternatives. However, they’re more complex and expensive to establish and maintain. Actuaries must determine annual contribution amounts, and employers must file annual Form 5500 returns.

Generally offered to employees aged 21+ with 1,000+ annual hours, these plans primarily rely on employer funding. Benefit payments begin after specified events, with some plans permitting loans.

Closing Statement

"To discuss your options when it comes to setting up a retirement plan for your business, please contact us. IronOak Wealth is here to help!"

Disclosure

This article provides informational purposes only and shouldn’t substitute for tax, legal, or financial advice. Consult qualified advisors regarding your unique circumstances before establishing or modifying retirement plans.