Retirement Savings Plans: Options 

Providing retirement savings plans for your employees will both attract quality candidates and increase staff retention. You have three options when considering retirement plans for small business: The Simple IRA, Traditional 401(k) plans, or Safe Harbor 401(k) Plans.

Simple IRA: A Simple IRA is, as its name indicates, the simplest of retirement plans. With a Simple IRA, the IRS exempts you from all of the tests that are required of traditional 401(k) plans and does not require you to file a Form 5500 annual filing, which substantially reduces administrative hassle and costs.

All employees making $5,000 or more per year during the past two years or who are expected to earn such amounts in the current year must be included in the plan. Employees can currently contribute only $12,500 annually ($15,500 for those over 50) to their accounts. 

Employers generally must either match 3% of an employee’s salary This requirement does not apply if the employer makes nonelective contributions instead. Lower percentage. An employer may choose to make a matching contribution less than 3%, but it must be at least 1% and for no more than 2 out of 5 years

All contributions to a Simple IRA are fully vested immediately.

With a Simple IRA you must send the contributions on your own, as opposed to a 401(k)  administrator doing it for you. Additionally, the Simple IRA does not allow for the Roth IRA, which may disqualify higher-salaried employees from contributing at all.

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The following two options, The Safe Harbor 401(k) and the Traditional 401(k), include two components: the Plan Sponsor and the Broker of Record. For more information on what each is responsible for with 401(k) retirement plans, read this article.

Safe Harbor Plan 401(k) Plans: This is the "happy medium" between the limited Simple IRA and the Traditional 401(k) retirement savings plan. Employees may contribute $18,000 per year for ($24,000 over age 50).

One reason many medical practices and other small businesses do not utilize traditional 401(k) plans is that they find it difficult to satisfy certain non-discrimination requirements. The Small Business Job Protection Act of 1996 created the "Safe Harbor" with simplified methods of meeting the non-discrimination requirements. One of the requirements for a traditional 401(k) is "Top Heavy Testing". A 401()k is generally considered "top heavy" if the present value of the cumulative accrued benefits under the plan for "key employees" (the doctors, for example) exceeds 60% of the present value of the cumulative accrued benefits of all employees.

Similarly, a defined contribution plan is generally considered top heavy if the aggregate of the accounts of key employees exceeds 60% of the aggregate accounts of all employees. With Safe Harbor 401(k) retirement plans, this requirement is eliminated; however, the Doctor or practice owner must match the first 3% of employees contributions and match 50% of the next 2%.

What are you giving up by going the Safe Harbor route? Required employer contributions are 100% vested at all times, whereas traditional 401(k)'s can create a vesting schedule. Additional Employer contributions are more flexible for the traditional 401(k) than Safe Harbor 401(k) retirement plans. Administration fees are more for either 401(k) Safe Harbor plans or a Traditional 401(k) than a Simple IRA.

Traditional 401(k): Like the 401(k) Safe Harbor plans, employees may contribute up to $18,000 per year for ($24,000 over age 50).

But unlike the other retirement savings plans discussed, a Traditional 401(k) does not require a 3% employer contribution; the match is flexible, subject to 401(m) test. All employer contributions may be subject to a vesting schedule.

As indicated above, however, the Traditional 401(k) is subject to a number of tests (the 401(k) and 401(m)  tests, and Top Heavy Testing) which may make it impossible for a small business to meet.

See our Glossary of Payroll Terms for details of these tests, as well as other definitions relating to retirement savings plans.

How do you avoid paying exorbitant 401(k) fees? Although all fees are disclosed, it is often hard to tell what you will be paying. Read this article on Managing 401(k) Plans to help you avoid paying more than you should.

For IRS guidance on types of retirement plans available, see 401(k) Plans

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