Which Retirement Savings Plans Are Right For Your Business?

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 401k plans, or Safe Harbor 401k Plans.

Simple IRA:A Simple IRA is, as its name indicates, the simplest of retirement savings plans. With a Simple IRA, the IRS exempts you from all of the tests that are required of traditional 401k 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 $11,500 annually ($14,000 for those over 50) to their accounts as opposed to $16,500 for 2009 ($22,000 for those over 50) with either traditional 401k plans or Safe Harbor 401k Plans.

Employers generally must either match 3% of an employee’s salary deferrals or make an across-the-board non elective contribution of 2% of each employee’s salary. Provided adequate notice is given to employees, employers may occasionally elect to match less than 3%, but not less than 1% of employee income. 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 401k 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.

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

Safe Harbor Plan 401k Plans: This is the "happy medium" between the limited Simple IRA and the Traditional 401k retirement savings plan. Employees may contribute $16,500 per year for 2009 ($22,000 over age 50).

One of the reasons why many medical practices and other small businesses do not utilize traditional 401k 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 401k is "Top Heavy Testing". A 401k 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 401k 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 traditionals can create a vesting schedule. Additional Employer contributions are more flexible for the traditional 401k than Safe Harbor 401k retirement plans. Administration fees are more for either 401k Safe Harbor plans or a Traditional 401k than a Simple IRA.

Traditional 401k: Like the 401k Safe Harbor plans, employees may contribute up to $16,500 per year for 2009 ($22,000 over age 50).

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

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

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