In addition to operating the day-to-day activities of a business, a business owner also has long-range goals which involve making sure that their business has retirement plans in place for themselves and the business’s employees. A number of different retirement plans are available to businesses, and each has its own detailed rules and benefits. The following are simple summaries of a variety of different types of retirement plans:
- Simple IRA. A Simple IRA allows a maximum employee contribution of $12,000.00 in 2014 and also provides for a catch-up contribution of $2,500.00 for employees over 50. This type of plan must be set up before employees of the company are able to make the salary deferrals. In addition, employers may make contributions on a dollar-for-dollar basis for up to 3% of the employee contribution or a 2% contribution to certain eligible employees. In order for an employee to be eligible for this, two-year service employment is required as well as a salary of at least $5,000.00.
- SEP IRA. A SEP IRA provides that an employee may make a contribution of 25% of their compensation. This type of plan must be in existence before the business’ tax filing deadline. The number of employer contributions can be up to 25% of employee compensation up to certain limits and may vary each year. The employee must be 21 with compensation of at least $550.00 annually.
- Profit Sharing Plan. A Profit Sharing Plan provides that the employee’s individual contribution must be the lesser of 100% of compensation, or $52,000.00 for 2014. Once again, the employer contribution percentages can change each year, and the employee must be 21 years of age. Certain service requirements exist for the employee.
- 401(k). A 401(k) provides that individual employees may contribute a maximum of the lesser of $17,500.00 in 2014, or up to 100% of their compensation if the compensation is less than $17,500.00 and also provides for a catch-up contribution of $5500 for employees over 50. Employer’s contributions each year will vary, and the employee must be 21 years of age with the employment of one year and 1,000 hours of service per year.
- 403(b) plans. Generally, a 403(b) plan is a tax-sheltered annuity plan for employees of charities, schools and medical organizations, and ministers. This type of plan allows for employees to contribute pre-tax or after-tax income amounts and the number of contributions is similar to 401k contribution limits.
- Safe Harbor 401(k). A Safe Harbor 401(k) also provides in 2014 for an employee contribution of a maximum of the lesser of $17,500.00 or 100% of compensation if it is less than $17,500.00. The employer is required to contribute to this type of plan. The contribution may be a dollar-for-dollar match up to 3%, plus 50¢ per dollar above 3% up to 5%, or 3% on a non-elective contribution to certain eligible employees. Just like with the 401(k), the employee must be 21 years of age, have served as an employee for one year, and have 1,000 hours of service per year.
- Defined Benefit Plan. A Defined Benefit Plan is an annual retirement benefit that will not exceed 100% of the average compensation of the three highest consecutive years or $210,000.00 benefit per year. The funding requirement in this type of plan is determined by an actuary, and the contribution amount is determined each year to meet the employer funding requirements for this type of plan. The employee must be 21 years of age, have service of one year and 1,000 hours of service per year, or at least two years of service, to immediately be vested in the plan.
Employers should meet with their attorneys, accountants, and financial advisors to determine what plan, if any, would best fit their specific facts and circumstances concerning their business to determine a retirement plan that is most beneficial to them and their business employees. Employees should also meet with their advisors to develop a retirement plan and make sure they are utilizing their employer’s retirement plan to the fullest.
NOTE: This general summary of the law should not be used to solve individual problems since slight changes in the fact situation may require a material variance in the applicable legal advice.
James F. Contini II, Esq.
Certified Specialist in Estate Planning,
Trust & Probate Law by the OSBA
Krugliak, Wilkins, Griffiths & Dougherty Co., LPA
158 North Broadway
New Philadelphia, Ohio 44663