Residents of State College and most of Pennsylvania were stunned by the sharp budget cuts proposed for Penn State University. For the first time in decades, employees of Penn State are concerned about their jobs and their benefits. Living in State College for almost 20 years, I often hear Penn State employees remark that the benefits are the reason they stay. Anyone with college-age children yearns for the Penn State tuition benefits enjoyed by families of employees. Many employees count down the months and years (sometimes I think minutes and seconds) until they are vested into retirement health benefits at PSU.
In essence, benefits matter! Most businesses cannot afford the luxurious benefits bestowed on Penn State employees. However, just because you can’t do everything, doesn’t mean that you should not try to do something. This is an overlooked area for small businesses that can allow them to hire and retain key employees.
My expertise lies in retirement plans for small businesses, and there are inexpensive plans that are specifically created for these organizations. The two most commonly used are the employer IRA plans: the SEP IRA and SIMPLE IRA. I am going to discuss some advantages and disadvantages to each plan. This is not comprehensive, and there are further details to review before deciding if or what plan is right for a small business.
The SEP IRA is often used by sole proprietors or the self-employed and has many advantages for an employer with uneven earnings from year to year. The disadvantage is that it permits only employer contributions and is similar to a profit sharing plan. A SEP may be set up by an employer or sole proprietor at tax time and all contributions are expensed to the employer. The same percentage of salary must be used for all employees. The plan permits as much as 25 percent of W2 earnings or 20 percent of net self-employment income with a maximum dollar amount of $49,000 for 2010 and 2011. The SEP is easy to set up and avoids the annual IRS filings.
A SIMPLE IRA is restricted to companies with fewer than 100 employees and permits employee and employer contributions. The employer contributions are limited to either a three percent match or a two percent non-elective contribution for every employee. This plan is attractive because the employee can contribute and have more “skin in the game.” The most an employee can contribute is $11,500 ($14,000 if the participant is older than 50). The advantage is that the employee can contribute per pay period along with the employer, which allows for a more even flow throughout the year rather than one large sum at tax time. The SIMPLE is fairly, er, simple and does not require IRS testing. However, the SIMPLE must be established by Oct. 1 for the current contribution year.
An alternative to a SEP IRA is the Individual 401(k), a.k.a. solo 401(k), solo k, and uni-k. The advantages of the Individual 401(k) over a SEP are these: the contribution limit can be much higher at the same income level with a maximum of $49,000 ($54,500 for those over 50), and loans are permitted from 401(k) plans up to 50 percent of the total 401(k) value with a $50,000 maximum. The downside is that the individual 401(k) can have potentially higher administrative fees and more administrative responsibilities.
Nestlerode & Loy, Inc., recently moved from a SIMPLE IRA to a traditional 401(k). A 401(k) is more expensive to administer, but it also expands options. As compared to the SIMPLE, the employee contributions increase from $11,500 ($14,000 over age 50) to $16,500 ($22,000 over age 50) for a 401(k) plan. In addition, a profit sharing can be tacked onto a 401(k) to increase employer contributions in a good year, but a business in a SIMPLE IRA plan is prohibited from having another retirement plan open in the same year.
The type of plan that works best for your organization depends on the priorities you set. One thing is for sure: owning your own business puts your success into your own hands. It also makes you dependent on yourself for retirement. The important thing is to start somewhere, and think big.
