Retirement Plan Options for Small Businesses

Employer-sponsored retirement plans have become a key component for retirement savings. They are also an increasingly important tool for attracting and retaining the high-quality employees you need to compete in today’s competitive environment.

Besides helping employees save for the future, however, instituting a retirement plan can provide you, as the employer, with benefits that enable you to make the most of your business’s assets. Such benefits include:

  • Tax-deferred growth on earnings within the plan
  • Current tax savings on individual contributions to the plan
  • Immediate tax deductions for employer contributions
  • Easy to establish and maintain
  • Low-cost benefit with a highly-perceived value by your employees

Here’s an overview of four retirement plans options that can help you and your employees save:

SIMPLE: Savings Incentive Match Plan

A SIMPLE IRA plan allows employees to contribute a percentage of their salary each paycheck and to have their employer match their contribution. Under SIMPLE IRA plans, employees can set aside up to $12,000 in 2014 (same as 2013) by payroll deduction. If the employee is 50 or older then they may contribute an additional $2,500. Employers can either match employee contributions dollar for dollar – up to 3 percent of an employee’s wage – or make a fixed contribution of 2 percent of pay for all eligible employees instead of a matching contribution.

SIMPLE IRA plans are easy to set up by filling out a short form. Administrative costs are low and much of the paperwork is done by the financial institution that handles the SIMPLE IRA plan accounts. Employers may choose either to permit employees to select the IRA to which their contributions will be sent, or to send contributions for all employees to one financial institution. Employees are 100 percent vested in contributions, get to decide how and where the money will be invested, and keep their IRA accounts even when they change jobs.

SEP: Simplified Employee Pension Plan

A SEP plan allows employers to set up a type of individual retirement account – known as a SEP-IRA – for themselves and their employees. Employers must contribute a uniform percentage of pay for each employee. Employer contributions are limited to whichever is less: 25 percent of an employee’s annual salary or $52,000 in 2014 ($51,000 in 2013). SEP plans can be started by most employers, including those that are self-employed.

SEP plans have low start-up and operating costs and can be established using a single quarter-page form. Businesses are not locked into making contributions every year. You can decide how much to put into a SEP each year – offering you some flexibility when business conditions vary.

401(k) Plans

401(k) plans have become a widely accepted savings vehicle for small businesses and allows employees to contribute a portion of their own incomes toward their retirement. The employee contributions, not to exceed $17,500 in 2014 (same as 2013), reduce a participant’s pay before income taxes, so that pre-tax dollars are invested. If the employee is 50 or older then they may contribute another $5,500 in 2014 (same as 2013). Employers may offer to match a certain percentage of the employee’s contribution, increasing participation in the plan.

While more complex, 401(k)plans offer higher contribution limits than SIMPLE IRA plans and IRAs, allowing employees to accumulate greater savings.

Profit-Sharing Plans

Employers also may make profit-sharing contributions to plans that are unrelated to any amounts an employee chooses to contribute. Profit-sharing Plans are well suited for businesses with uncertain or fluctuating profits. In addition to the flexibility in deciding the amounts of the contributions, a Profit-Sharing Plan can include options such as service requirements, vesting schedules and plan loans that are not available under SEP plans.

Contributions may range from 0 to 25 percent of eligible employees’ compensation, to a maximum of $52,000 in 2014 ($51,000 in 2013) per employee. The contribution in any one year cannot exceed 25 percent of the total compensation of the employees participating in the plan. Contributions need not be the same percentage for all employees. Key employees may actually get as much as 25 percent, while others may get as little as 3 percent. A plan may combine these profit-sharing contributions with 401(k) contributions (and matching contributions).

Call Us First

Pension rules are complex, and the tax aspects of retirement plans can also be confusing, so call us first. We’ll help you find the right plan for you and your employees.

Small Businesses See Financial Conditions Improving

Small businesses across the U.S. are feeling more optimistic about the months ahead as financial conditions rebound, but concerns remain about hiring and growth, according to a new report.


Capital One’s Spark Small Business Barometer for the second quarter found that 45 percent of small businesses across the country are reporting that they believe their financial position will be better in six months, a seven-point increase from the fourth quarter of 2012 (38 percent) and a two-point increase from Q2 2012 (43 percent).


The survey indicated that small business owners are financially better off than a year ago, with 35 percent of small businesses saying their firm’s financial position is better than a year ago, compared with 18 percent who report that their financial position is worse—a significantimprovement over Q4 2012, when a two-year high of 27 percent said their finances were worse.

Sixty-four percent of small businesses are optimistic about the local economy where they do business, but slightly less than half (48 percent) are optimistic about the state of the national economy.


Despite the improving optimism about the economy, small businesses are still reluctant to hire. Two-thirds of the small businesses polled do not have plans to hire in the next six months, a 1 point decrease from Q4 2012 (68 percent), but seven points higher than Q2 2012 (60 percent).


“Our survey results for the second quarter indicate that while optimism and confidence are on the rise and more small businesses are on sound financial footing, concerns and uncertainty continue to hold back plans for staffing increases and growth,” said Jon Witter, president of direct, consumer and small business banking at Capital One in a statement. “While many small businesses have seen an uptick in sales over the past six months, this is not necessarily translating into significant new hires or investments in the business.”


More than half (52 percent) of small businesses across the country report that current business conditions are fair or poor, while 46 percent report that business conditions are excellent or good. While the majority of those surveyed report that they are less than optimistic about current business conditions, 35 percent of small businesses say their firm’s financial position is better than a year ago, compared with 18 percent who report that their financial position is worse. This is a significant nine point decrease from the two-year high of small businesses that said their financial position was worse in Q4 2012 (27 percent). This quarter’s results are on par with the slow, but steady trend of business owners feeling better about their firm’s financial shape and positive outlook about future prospects that has developed since Capital One issued its first quarterly survey in Q1 2009.


Nearly half of small businesses across the country are reporting that they believe their financial position will be better in six months (45 percent), which could be attributed to the increase in sales that 35 percent of small businesses saw during the past six months. This is a 7 point increase from Q4 2012 (38 percent) and a 2 percent increase from Q2 2012 (43 percent). This quarter, only 10 percent of small businesses report that they think their financial position will be worse in six months, a significant 10 point decrease from Q4 2012 (20 percent), but a 2 percent increase from Q2 2012 (8 percent). Forty-one percent of small businesses report they believe their financial positions will be about the same in six months.



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Job Creation up at Small Businesses, but Not Hiring Plans

While small businesses again appear to be hiring, plans to create more jobs appear to be slackening, according to the National Federation of Independent Business.


Small-business owners reported increasing employment an average of 0.19 workers per firm in the month of March, which was the best reading the NFIB has recorded in a year and the fourth consecutive month of small-business job growth, according to NFIB chief economist William C. Dunkelberg. Forty-seven percent of the owners hired or tried to hire employees in the last three months and 36 percent (or 77 percent of those trying to hire or hiring) reported few or no qualified applicants for open positions. But, while actual job creation appears to be rising, plans to create jobs took a dive, falling 4 points to a net zero percent of small employers who plan to increase total employment.

“It seems that the stamina for growth is waning, even with decent reports on consumer spending at the macro level,” Dunkelberg said in a statement.

Eighteen percent of all business owners reported job openings they could not fill in the current period, down 3 points from February. This measure is highly correlated (inversely) with the unemployment rate, so it is suggestive of a minor increase in the percent of our labor force that is unemployed. The Bureau of Labor Statistics numbers on Friday will likely hold steady, Dunkelberg predicted, but prospects for stronger gains over the next few months are not promising.

“Once again, our bifurcated economy may have large firms doing well, but the Main Street owners not sharing in the gains and finding little reason to take on new employees,” said Dunkelberg. “Owners are still pessimistic and see little reason to hire. Small businesses need a shot in the arm; but seeing as this is unlikely, the slow crawl to eventual prosperity might be the best we can hope for.”

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Small Businesses Confused by 401(k) Fee Notices

Many small business owners are confused by the fee notices and costs of their 401(k) plans and have trouble answering questions from employees, according to a new survey.


Over the summer the U.S. Labor Department established new rules to make it easier for 401(k) plan sponsors and participants to understand how much they are paying in 401(k) fees. But a recent national survey of 500 small business owners conducted by ShareBuilder 401k found many plan sponsors are still feeling confused when it comes to understanding the costs within their plans, and are unprepared for questions from their employees.

“Our survey results suggest many small business owners are still in the dark when it comes to their 401(k) plans and costs, demonstrating our industry has more work to do in disclosing fees transparently and in ways that are easy to understand,” said ShareBuilder 401k president Stuart Robertson in a statement. “Everyone has a right to know the fees they’re paying for their 401(k) as over the course of a career, paying an extra percentage point can shrink your nest egg by hundreds of thousands of dollars.”

The survey found that while 92 percent of small business owners claimed to be aware of the new rules requiring 401(k) providers to distribute documents fully disclosing all plan fees, only 60 percent recall receiving the new documents at all.

Of the small business owners who did recall receiving new fee disclosure documents, the average time spent reviewing the documents was 16 minutes, and the vast majority (83 percent) walked away with questions about what their company should do now. Additionally, 68 percent said they are not fully prepared to answer employee questions about their plans.

More than a third (37 percent) of the survey’s respondents have hired, or plan to hire, a consultant to help them to understand their options, and nearly as many (34 percent) have gathered, or plan to gather, benchmarking data to help them compare alternate retirement plans for their company. However, despite increased transparency, few business owners are using this as an opportunity to negotiate their plan with their current 401(k) provider (33 percent) or to shop for a new plan provider (26 percent).

Fees are typically based on a percentage of a plan’s total assets. On average, small business owners said they think 4 percent is a fair rate, which is significantly higher than the average 401(k) fee percentage, demonstrating lack of awareness about the options available and the impact that fees can have on long-term savings.

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Small Businesses Report Better Business Conditions

A new survey of small business owners in the U.S. indicates that the percentage who report favorable business conditions has nearly doubled since 2010.


The survey, by Citibank, found that 43 percent of small business owners consider business conditions to be positive. That represents a significant increase since August 2010, when 24 percent of small business owners surveyed reported overall positive business conditions.

One-third (33 percent) of the survey respondents said their own business is better than it was a year ago — up from 26 percent in January. Another 33 percent expect their business will grow by more than 10 percent this year.

As part of the reinvention process, small business owners said they have focused on overhauling the products or services they offered (47 percent). This was followed by adjusting their infrastructure, such as technology or staffing (24 percent) and beefing up their sales and marketing (18 percent). A small amount (7 percent) said they reduced pricing and took less profit. Only 3 percent have relocated.

The following steps were cited as ways that small business owners kept their business thriving: 88 percent kept updated and knowledgeable about their field, 70 percent increased face time with customers, 67 percent updated or upgraded their computer systems, 52 percent increased their use of the Internet and social media, and 51 percent built a network of suppliers and partner companies.

As for the steps they plan to take during the remainder of 2012, 65 percent expect to increase marketing, 56 percent will work to get better pricing on expenses, 52 percent expect to work even longer hours, 50 percent will introduce new products or services, and 49 percent will use social media, such as Facebook or Twitter, to market their business.

Part of that reinvention comes from spending, as shown by 38 percent of respondents who increased the amount they spent on capital investments such as computer, inventory and facilities over the past 12 months. Their top two sources of funding have been revenue and profits (75 percent) and personal savings (62 percent).

The past few years have taken a personal toll on small business owners: 63 percent said the major challenge they face owning or running a business was personal stress and being accountable for everyone and everything, second only to the general state of the economy (66 percent).

Despite overall optimism, small business owners report making significant sacrifices to keep their businesses going and growing over the past few years. Not only did 78 percent take less profit to support the business at some point in the past, 66 percent did so to pay employees rather than reduce staff. A significant majority (70 percent) also say they worked more hours than usual, often sacrificing family time and missing vacations.

In addition to using their own money to help their business survive (69 percent), the majority of small business owners (54 percent) said they have gone without a paycheck. Looking back over the history of their businesses, almost one-quarter (23 percent) have gone without pay for one year or more.

Eighty percent of small business owners believe their employees appreciate the sacrifices they made to keep their businesses operating. Demonstrating true commitment, employees showed thanks by their own investment in the success of the company. More than one-third (38 percent) of owners said their employees worked additional hours without pay. Another 18 percent credited their employees with voluntarily missed or delayed paychecks.

To show their own appreciation of employees, small business owners offered additional time off (78 percent), a bonus (74 percent) or a raise (70 percent).

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Small Businesses Proceed Cautiously as Economy Improves

More than one-third (35 percent) of small business owners believe the economy is recovering, but they are proceeding cautiously and managing their resources more closely by tempering plans for growth, hiring modestly and getting more out of their employees.

A new survey by American Express found that 67 percent of the small owners polled say that workforce productivity has improved and fewer are concerned about having cash available to pay bills (50 percent vs. 59 percent last spring).

The employment picture is improving at small businesses, with 35 percent planning to hire full- or part-time employees (up from 31 percent in the fall), and far fewer said they will freeze hiring or cut back (44 percent, down from 61 percent in the fall). In spite of the promising outlook, these signs of recovery do not translate into immediate plans for growth. The top priority of small business owners is maintaining their current business and sources of revenue (31 percent) followed closely by growing their business (29 percent, down from 37 percent last spring).

Thirty-four percent of business owners say their appetite for risk is greater than it was a year ago. Men are far more likely to say their appetite for risk is greater than it was a year ago (42 percent compared to 25 percent of women). The type of risk entrepreneurs are most willing to assume in order to grow their business is entering a new/unexplored market (19 percent).

While growth is not currently a top priority, when asked what would most help them grow their businesses, nearly half (46 percent) say increased customer demand. Other growth generators include tax cuts (20 percent), access to capital (13 percent) and the ability to hire more staff (7 percent). Tax relief is the most pressing issue the President and Congress need to address (33 percent).

Entrepreneurs looking beyond U.S. borders for growth opportunities are among those most likely to experience steady revenue gains. While they are still the minority (15 percent), their success is noteworthy: they report 23 percent revenue growth on average over the last three years.

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Small Businesses Anticipate Bigger Revenues

Small business owners are the most optimistic they have been since July 2008 and expect increased revenues and more hiring this year, according to a new survey by Wells Fargo and Gallup.

The Wells Fargo/Gallup Small Business Index survey for the period Jan. 9-13, 2012 now stands at positive 15 for January, compared to minus 3 in October and following two previous readings of zero, indicating the small business owners surveyed were neither optimistic nor pessimistic.

Forty-nine percent of the small business owners surveyed said they expect revenues to increase a lot or a little, up from 37 percent in the fourth quarter of last year. In addition, 63 percent anticipate their company’s financial situation to be very or somewhat good over the next 12 months, up from 55 percent in the fourth quarter.


In terms of hiring, 22 percent of the respondents expect the number of jobs at their company to increase a lot or a little, up from 15 percent in Q4 2011, while 8 percent expect the number of jobs at their company to decrease a lot or a little, down from 13 percent in Q4.

When asked about cash flow, 53 percent of the surveyed small business owners expect their cash flow to be very or somewhat good this year, up from 48 percent in Q4 2011. In addition 27 percent of the respondents expect credit to be very or somewhat easy to obtain, up from 22 percent in Q4 2011; while 38 percent expect credit to be very or somewhat difficult to obtain, down from 43 percent in Q4 2011.

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