Choosing a Retirement Plan

Attract and retain top talent to your business, help current employees save for their future, and enjoy potential business tax savings. It's all possible by offering a retirement plan as part of your employee benefits package. Learn more about the types of plans available and contribution requirements to determine the best option for your business.

Retirement Plan Types

401(k) Plan

A 401(k) plan encourages employees to save for retirement through pretax and Roth 401(k) contributions. Pretax contributions are deferred until your employees draw from their accounts. Roth 401(k) contributions are made post-tax, and can be withdrawn tax-free under certain conditions.

As the employer, you have the option to match part or all of the employee's deferrals. If you prefer, you can offer a profit sharing contribution that is allocated to eligible participants regardless of whether they defer into the plan.

Your employees decide how much they want to contribute to the plan, and through payroll deductions, that percentage goes into the individual 401(k) accounts. Contributions may come from:

• Elective contributions – Also called salary deferrals, these wages are chosen by the plan participant to defer into the plan. From the day it is contributed to the plan, this money is 100 percent vested.
• Matching contributions – As an optional employer contribution to the plan, the amount of money provided to the participant depends on the employee's compensation, elective contribution, and match. They are subject to the vesting schedule.
• Profit-sharing contributions – The employer determines how much to contribute each year. The amount contributed is given to every eligible participant.
• Rollover contributions – Employees can transfer their account balances from another qualified plan or tax-deductible IRA to their current 401(k) plan.

SIMPLE 401(k)

Saving Incentive Match Plan for Employees (SIMPLE) requires an employer to make one of the following contributions to the plan:

• Non-elective contribution of at least 2 percent of compensation for all eligible employees
• Matching contribution of at least 100 percent up to the first 3 percent of compensation

SIMPLE 401(k) provides small business owners with less than 100 employees a cost-effective way to offer retirement benefits to their employees. It is not subject to annual nondiscrimination testing and may allow for loans. Employers cannot maintain any other retirement plan for employees who are eligible to participate in the SIMPLE 401(k).

Other Plan Types

Money Purchase Plan

A fixed employer contribution is required, usually a percentage of compensation, to an employee's individual account. An employer can have other retirement plans along with a money purchase plan, and the business can be any size. This plan does not have a cash deferral option.

Profit Sharing Plans

Contributions are made by the employer. The business owner has the flexibility to contribute and deduct between 0 and 25 percent of eligible participants' compensation. A profit sharing plan does not require a net profit, but offers a way for employees to share an employer's profit. A major benefit is the possible tax-deferred growth potential, since any investment earnings are tax-deferred until withdrawn.

SIMPLE IRA

Employees and employers make contributions to Individual Retirement Arrangements (IRAs) set up for employees. A SIMPLE IRA is for employers who do not sponsor another type of plan and have fewer than 100 employees. Under this plan:

• The employer provides either a 2 percent profit sharing or a 3 percent match to an individual account set up for each eligible employee.
• Employees defer a part of their salaries into the plan for retirement.
• Each employee is always 100 percent vested in his or her SIMPLE IRA.

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