Small/Micro Business Retirement Plan Overview: My Chat With Jill James

Recently I did a LinkedIn Live with Jill James of Sif Industries - we discussed small business finance and retirement plans. Here's an overview of our chat in Q&A format, plus some of the things that I wish I had thought to share with you!

What Retirement Plans Should I Be Considering?

For small business owners, if you want to save $6,000 or less, you can use a Traditional or Roth IRA. (There are also a few states that offer a state-sponsored IRA retirement plan, such as Oregon, California, Illinois, and others.) Once you want to save more, the most common options are a SEP, SIMPLE, or 401(k). Retirement plans are covered by federal laws, so it doesn't matter where your business is located in the US. We all have the same options. 

How Much Can I Save?

SIMPLE IRAs allow you to contribute up to $13,500 ($16,500 if you're turning age 50 or older this year). In a SEP or 401(k) in 2021, it may be as much as $58,000 ($64,500 for age 50+). You can check the IRS website for contribution limits, which change as often as annually, since they're indexed to inflation.

Your maximum contribution will depend on your plan type, company profit, and salary. For example, SEP contributions are strictly contributions the employer makes on behalf of the employee, whereas 401(k) plans can have multiple sources, including employee deferrals, employer profit sharing, employer match, etc. 

What Should I Consider When Choosing and Designing a Plan?

You should consider how profitable you are, how much you want to save, whether you have (or plan to have) employees, what Safe Harbor or other employer contribution requirements you'll need to meet, what appetite you have for fiduciary administration and overhead, and what kind of investment options and responsibility you want to have within the plan. When you run scenarios for the plan type, make sure to review it with your accountant to fully understand the “true” cost and also the tax savings! 

SEP and SIMPLE are both IRA plans, so if you have employees, they are responsible for setting up their own account and selecting investments. In a 401(k), you, as the plan sponsor, will have oversight on that investment menu selection and must make sure the plan is run in alignment with the rules in its plan document as well as federal regulations. (Welcome to fiduciary responsibility, and welcome to a new overhead cost. Budget $5,000/yr minimum.) SEP and SIMPLE both have 100% immediate vesting on any amounts that you might give to employees. 401(k) can use a vesting schedule, where employees earn ownership [read: portability if they leave working for you] of the employer contributions over time. 

Generally speaking, the more generous you are with employees, the more generous the IRS lets you be with yourself and the higher paid management group as far as contributions go in a 401(k) plan. While IRAs are not subject to non-discrimination testing, 401(k)s are (which is part of the added administration expense). The skinny is that the owners/highly compensated employees can't benefit from the plan substantially more than the rank and file or the IRS makes you jump through certain - sometimes expensive - hoops. If you can afford to give everyone a 3% contribution or a 4% match, you can forgo the testing with a Safe Harbor contribution plan design.

What Deadlines Do I Need to Meet?

If you don't have an existing plan, you have two options for 2020: set up and fund either a SEP or a 401(k) in Q1. (In this scenario, with either plan you'll be contributing employer dollars, no salary deferrals for 2020.) You have until you file your 2020 taxes plus extensions, either March 15 or April 15, 2021, to get either plan open and funded. (The 401(k) deadline is new with the SECURE Act.) Generally, SIMPLE IRA plans can be effective on any date between January 1 and October 1. Check with your accountant for details. 

If you have an existing 401(k), you will be able to make a profit sharing contribution through the time you file your taxes plus extensions. If you prefer to start a 401(k) in 2021, set that up as soon as possible so you can start making deferred salary contributions.

What Other Things Do I Need to Know about Starting a Plan?

In addition to the nice tax savings that you have, you may be able to claim a tax credit up to 50% of the costs for some of the ordinary and necessary costs of starting a SEP, SIMPLE IRA or 401k. Reminder: a tax credit reduces the amount of taxes you may owe on a dollar-for-dollar basis! You can get more details from your accountant or here: https://www.irs.gov/retirement-plans/retirement-plans-startup-costs-tax-credit

Who Should I Call to Get One of These Plans?

For yourself or just a few employees, a financial advisor, your state-run IRA plan’s website, private wealth manager at your bank, or even an online brokerage are easy options. If you have a larger number of employees - say, over 10 - and you're starting to think not just in terms of your own tax and retirement savings but also company growth, retention, and recruiting, you'll want to work with a retirement plan advisor/specialist (you know, like us!). It's a good idea to revisit your plan annually just to make sure it's still living out its intended purpose. It's easy for the retirement plan to fall out of alignment with its original purpose as your business grows and changes.

Start by answering this question: What's this retirement plan supposed to do for me and my business? It’s also a good idea to make your financial team talk to each other to align goals -- accountant, financial advisor, retirement plan advisor, etc.

Further Help - IRS Links

Believe it or not, the IRS website is a treasure trove of information that is accessible and straightforward. Start here to get the nuts and bolts of each plan type: 

https://www.irs.gov/retirement-plans/401k-plans

https://www.irs.gov/retirement-plans/plan-sponsor/simple-ira-plan

https://www.irs.gov/retirement-plans/plan-sponsor/simplified-employee-pension-plan-sep 

Final Note:

Everything in this article is there to help you get started and know the questions to ask, and is intended as educational in nature only! It was accurate at the time of writing but it cannot be relied upon in the future. You need to consult the appropriate tax professional for help on your particular situation. Retirement Planology doesn’t render legal or tax advice.

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Courtenay Shipley, CRPS, AIF, CPFA has a diverse background in the retirement plan industry providing a unique foundation for her clients in the areas of fiduciary responsibility, investment analysis, and participant education. During her career she has provided institutional investment consulting to qualified retirement plans, developed business strategy for a boutique third party administrator and recordkeeper, conducted over 9,000 education meetings to groups and individual employees, and served the nonprofit market.

Courtenay is a graduate of Vanderbilt University, and is licensed as an investment advisor representative (Series 66). She holds the Accredited Investment Fiduciary? (AIF?) designation through the Center for Fiduciary Studies, the Chartered Retirement Plan Specialist (CRPS) designation from the American College of Financial Planning, the Certified Plan Fiduciary Advisor (CPFA) from National Association of Plan Advisors, and the Certified Health Savings Advisor (CHSA) designation. Since 2015 she has been featured in the Financial Times Top 401 Retirement Plan Advisors annual list, named a Top Women Advisor All-Star by the National Association of Plan Advisors (2015, 2017-2019), and named a 2018 NAPA Young Gun: Top 75 under 40. Click here for award descriptions and criteria.