There are many pension plans on the market, and each is more complicated than the other. Selecting the best plan for yourself and your business is not easy, and it often leads to frustration.
To make the task easier, we have narrowed it down to two variables that are crucial to the decision-making process. These are:
- Employees: Does your business have employees (Yes/No)?
- Free Cash Flow: How much money are you looking to put aside in a retirement plan for yourself? Similarly, how much money are you comfortable contributing towards your employee retirement plan?
All contributions to a retirement plan are tax-deductible, so expect some savings on your taxes as well. Please do not hesitate to e-mail us at info@pensiondeductions.com if you have any questions about 401k for small business owners with employees.
If you have no employees, the following plans based on your cash flow may be the right choice for you.
- Small Business Owner 401k Low Cash Flow option: In this situation, you can opt for the solo/individual 401(k) plan. People under the age of 50 can contribute up to $19,000 and those over the age of 50 can contribute another $6,000, for a total of $25,000. These limits are adjusted annually by the IRS based on the cost of living increases.
- Small Business Owner 401k Medium Cash Flow option: Regardless of the size of the business, a profit-sharing plan is a good plan for a business with medium cash flow or inconsistent cash flow. It allows clients to contribute up to $56,000 annually and provides flexibility in choosing the amount of contributions in a given year. This plan can be beneficial if the company also employs the spouse and contributions can be made for the spouse, thereby increasing the total amount of contributions.
- Small Business Owner 401k Large Cash Flow Option: With high cash flow, you can always go for a single defined benefit life. DB plans depend on the age and earnings of the individual and may allow contributions of 60,000 to 250,000 in certain situations. You can use our defined benefit calculator to estimate the amount of contributions in the first year.
If you have employees, the IRS makes it mandatory that you provide retirement benefits to them as well. However, the IRS provides significant flexibility to allow business owners to accumulate higher retirement benefits and provide only the required benefits for employees. It also means that there are some compliance tests to be done in the retirement plan every year. According to the criteria discussed above, there can be three options for a business with employees.
- 401k for small business owners with employees Low Cash Flow Option with employees: Customers can choose a 401(k) plan with safe harbor provisions. This plan provides a maximum contribution of $19,000 for the business owner. If the business owner is over the age of 50, a catch-up contribution of $6,000 can be made. This plan also removes some of the mandatory compliance tests and facilitates administration. If the client has low but consistent cash flow, then the safe harbor option is the best choice.
There are two variations of a safe harbor 401k for small business owners with employees
401k for small business owners with employees safe harbor match: For the employees that contribute to their own 401(k), employers ‘match’ 100% of the employees’ contributions up to 4% of their compensation. This is the more popular option. This basically means that clients have to contribute only to those employees who defer to 401(k). If none of the employees defer to the 401(k), no contributions must be made to the employee’s retirement plan.
- 401k for small business owners with employees and a safe harbor non-elective: Irrespective of employees’ contributions, for every eligible employee, the employer contributes 3% of the employee’s compensation. This is ideally suited for a business where most people will refer to their 401(k) plans. The owner of the business can contribute the $18,000 and an additional 3% of W-2 wages for their retirement.
- 401k for small business owners with employees and a profit-sharing plan: If the owners of the business wish to contribute more towards their retirement plans, they can choose the New Comparability Profit Sharing Plan. This design allows contributions of up to $56,000 for owners and a contribution of 5% of W-2 salary may be required for employees. This plan allows the company to classify workers into different categories and give them different contribution rates. The plan sponsor can design the plan to reward a certain class of employees with a higher contribution percentage as long as it is within the limits prescribed by the IRS. The company may meet the non-discrimination requirements by setting a minimum contribution rate for all employees and by conducting non-discrimination tests for the pension plan.
- 401k for small business owners with employees and a safe harbor and a defined benefit plan: The
Floor Offset Defined Benefit Plan allows maximum contributions to the owners of the business and requires a contribution of 5% to 7.5% of W-2 wages towards the employees. For more information about a Floor Offset Plan, please refer to the Floor Offset Plan page.
Please feel free to email info@pensiondeductions.com if you need help developing a plan for your business.
