Small Business Retirement Plans in Connecticut

What is the best retirement plan for small business?

What is the best retirement plan for small businesses? 

Self-employed individuals and small business owners now have a variety of retirement plan options available to them that could potentially provide significant tax advantages while saving for retirement.

Deduction IRA
SEP IRA Simple IRA Individual 401(k)
Appropriate for: • Anyone with earned income • Self-employed, business owners or have a partnership
• Have few or no employees
• Have a company with fewer than 100 employees
• Want employees to make their own retirement contributions via salary deferrals (unlike a SEP IRA)
• Do not have any other active employer-sponsored retirement plan
• Self-employed or owner-only business with no employees (other than a spouse)
• Want to make larger contributions than allowed in a SEP IRA
• Want flexibility in the amount contributed annually
Maximum annual
contribution in 2018:
• $5,500 plus additional $1,000 catch-up if over 50 years old
• Up to 25% of compensation but no more than $55,000
• $12,500 plus additional $3,000 catch-up if over 50 years old.
• Either an employer match up to 3% OR an employer non-elective contribution to eligible employees up to 2%
Total employer/employee contributions cannot exceed $55,000 (plus potential $6,000 for catch-up for $61,000)
• $18,500 plus additional $6,000 catch-up if over 50 years old
• May contribute up to 25% of compensation if self-employed up to $55,000
Key attributes: • Easy to setup and maintain
• Low administrative costs
• Easiest to setup and maintain
• Flexible annual funding requirements
• Low administrative costs
• Salary reduction plan with little administrative paperwork
• Employees share responsibility for their retirement
• No discrimination testing required
• Requires limited level of employer contributions
• Partially funded by employee salary deferrals
• A 401(k) with potentially higher contribution limits than SEP IRA
• Features of a 401(k) but easier to administer
Who can contribute: • Employees only • Employer only • Employee salary deferral with either employer match or employer non-elective contributions • Employer contributions plus employee deferrals
Drawbacks: • No deduction for the business
• May not be deductable for employees
• Employer must contribute equally for all eligible employees
• No catch-up contributions
• Inflexible contributions
• Lower contribution limits than some other retirement plans
• Only available to self-employed with no other employees (other than spouse)
Vesting: Immediate Immediate Immediate Immediate
Filing requirements: Employer has no filing requirements Employer generally has no filing requirements Employer has no filing requirements No filing requirement until plan assets reach $250,000 and then Form 5500-EZ
Participant loans: Not permitted Not permitted Not permitted Yes
Plan setup deadlines: Can be setup or terminated at any time Plan must be adopted by employer’s tax filing deadline, plus extensions, usually April 15 Established by October 1 Plan must be adopted by last day of the business tax year (usually 12/31) for which contributions are made
Participation: Not required Required for all employees who are at least 21 years old who have:
• Been employed at least 3 of the preceding 5 years
• Earned at least $600 in 2018
Participation is required for all employees who:
• Are expected to receive at least $5,000 in compensation from business during the year
• Received at least this amount from the business in any 2 preceding years
• Must have no employees (other than spouse)
• A partnership is eligible only if each partner owns at least 5% of the business
• A corporation is eligible only if it has no employees other than a sole shareholder and his/her spouse

The above table is for informational purposes and is a high-level overview of potentially available plans. Please consult with a financial advisor or contact us for additional information.

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