PEP Plan: A PEP (Pooled Employer Plan) is a type of retirement vehicle that is maintained as a single plan while allowing multiple unrelated employers to participate, achieving economies of scale typically only attained by larger plans. It operates similarly to traditional, single-employer retirement programs but with the majority of administrative and fiduciary duties outsourced to the pooled plan provider. Benefits to you … more time to focus on business needs, reduce fiduciary responsibilities, protection of plan assets and single 5500, and audit for ALL adopting employers.
Payroll Deduction IRA: This isn't a company-sponsored retirement plan but simply an option to allow employees to specify an amount to withhold from their paycheck toward their own Traditional/Roth IRA that the company then forwards to the financial institution. It essentially makes it easier for employees to save toward their retirement and requires no financial overhead from the company.
SEP IRA: Short for "Simplified Employee Pension", SEPs are only funded with company contributions (i.e., employees do not have the option to contribute from their paychecks). The business can choose each year whether or not to make a SEP contribution (e.g., depending on profit/loss that year), but if a contribution is made, it must be contributed at an equal percentage of compensation across all eligible employees.
SIMPLE IRA: SIMPLE IRAs are a simpler version of a 401(k) — It enables employees to contribute to their accounts (up to $15,500 in 2023, with a $3,000 additional catch-up provision for those over 50), but it doesn't come with the annual tax return and other compliance requirements of traditional 401(k)s. Part of the reason is that there's a required company contribution equal to either 100% of an employee's first 3% contributed or a flat 2% of employee compensation regardless of employee contribution amount.
Traditional 401(k): Most people are familiar with the concepts around 401(k)s, which combine employee contributions ($22,500 max in 2023 with a $7,500 catch-up allowed for those over 50) and employer matching contributions. 401(k)s come with more flexibility around plan terms (like permitting loans) but also come with more regulatory requirements (like ensuring participation benefits are considered equitable among employees). As a result, they typically require an annual Form 5500 filing, non-discrimination testing, and more.
403(b): A 403(b) plan is virtually the same thing as a 401(k) plan, but it is designated for nonprofit organizations such as hospitals, public school systems, churches and so forth. Employees largely fund these plans, and contributions come with tax deductions up to a specified amount. Employers have the option to match contributions based on a certain percentage. At the time this money is taken out of the account, it is subject to taxation.
Solo 401(k): Yet another variant of the 401(k) is the Solo 401(k) (a.k.a., the “Individual 401(k)” or “One-participant 401(k)”, among others). As its name suggests, it's only available to small businesses whose owner is the only employee of the business. And the main benefit of a solo plan is that, presuming you have enough business profit, you can very easily put large amounts of money into the plan as both the employee and the employer.
Safe Harbor 401(k): Safe Harbor 401(k) came to avoid many of the regulatory hoops of a Traditional 401(k) by requiring either a specified matching contribution or a 3% of compensation contribution to all participants. (An annual Form 5500 still has to be filed, it's just simpler.)
Profit Sharing Plan: PSPs can either stand on their own or be combined with other plans (e.g., a common scenario is to pair with a 401(k)). The goal of a PSP is to contribute to the plan each year (you can decide if and how much based on how the year went) and then have it shared with eligible employees according to a specified formula. Employer contributions to this and some of the other plans can be vested over defined periods.
Administrative Complexity: Is the extra effort required around setting up and/or maintaining some of these plans too much of a hurdle, and you're simply looking for a way to direct money into retirement accounts? Then a Payroll Deduction IRA, SEP IRA, or SIMPLE IRA is likely a good fit for you.
Cash Requirements: Would you prefer the flexibility to make contributions in good years but not have minimum required company contributions if things are slimmer? Then a SEP IRA or stand-alone Profit Sharing Plan can do the trick. (Remember that certain plans will come with annual fees too, so that needs to be worked into your cash forecast.)
Desired Contribution Level: Do you have strong profits and are looking to put in $15,000k to $60,000+ each year? Then a SEP IRA, Solo 401(k), or Safe Harbor 401(k) paired with a Profit Sharing Plan are likely good candidates.
Eligibility Thresholds: Does your company have high turnover and/or do you want to limit participation to team members that have been with you for a minimum amount of time? Then SEP IRAs or SIMPLE IRAs can be good options.
Employee Contributions: Alternatively, you may want to be sure employees can direct their own money to retirement, in which case SEPs and Profit Sharing Plans won't work, while SIMPLEs and 401(k)s will. (Of course, keep in mind that employees are generally eligible to make personal IRA contributions even if the company doesn't have a plan.)
Tax Planning: Is the point of reducing your (or your employees') taxable income now? Then the Roth variants aren't going to do the trick, and plans with higher maximums (and especially large year-end discretionary company contributions) can empower flexible tax planning.
Plan Feature Availability: How important is it to have the ability to take loans against account balances? How about having company contributions vest over time? Or even hardship withdrawal provisions? If these are very important, then the 401(k) variants are likely the road to go.
The path to a secure retirement is choosing the proper retirement plan. We'll help you along the way!
Did You Know...
that retirement can last for 30 years or more?
You may need up to 80% of your current annual income to retire comfortably.
The average monthly benefit paid by the Social Security Administration is $1,700.
Why should you set up a retirement plan, and what are some of the benefits?
A retirement plan has lots of benefits for you, your business, and your employees. Retirement plans allow you to invest now for financial security when you and your employees retire. As a bonus, you and your employees get significant tax advantages and other incentives.
Business benefits
Employer contributions are tax-deductible.
Assets in the plan grow tax-free.
Plan options are flexible.
Tax credits and other benefits for starting a plan may help reduce costs.
Retirement plans can attract and keep better employees, which reduces new employee training costs.
Benefits for Employees
Employee contributions can reduce current taxable income.
Contributions and investment gains are not taxed until distributed.
Contributions are easy to make through payroll deductions.
Interest accrues over time, which allows small, regular contributions to grow into significant retirement savings.
Retirement assets can be carried from one employer to another.
The saver's credit may be available to some employees.
Employees can improve financial security in retirement.