Offering a retirement plan to your employees will cost you money, as well as time and effort. But the small business that can afford to do so will often be rewarded with a happier workforce, better-qualified applicants and significantly less turnover. Getting started on the right plan takes some thought and you’ll probably need a bit of professional help to avoid mistakes that can result in time-wasting legal problems and Formsheavy fines, says Gregg Wind (pictured), a partner in Los Angeles CPA firm Wind & Stern, LLP.
In a conversation with QuickBooks, Wind, whose firm specializes in small businesses and high net-worth clients, sketched out the basics of retirement planning for the owners of small businesses and answered some of the most common questions about setting up the right plan.
Where do I start?
Think about your goals and remember that you can include yourself in the plan. The very simplest plans, such as an IRA, require no IRS approval and are easy to set up, but do not give you nearly as much flexibility as “qualified plans,” which do require approval from our friendly tax collectors. Among other advantages, qualified plans let you make larger contributions each year and allow you or your employees to borrow against them.
Where do I turn for professional help, and how much will it cost?
Most small business owners will generally seek out a third-party administrator, or TPA, who will help design a plan. Designing and implementing a simple small business retirement plan can run an initial $1,000 to $3,500 and another $1,000 a year to maintain. Get a referral from your attorney or a CPA, and try to find a TPA that has some experience with companies like yours. (Wind’s firm does not offer TPA services.)
Who needs to be included in my plan?
Often the threshold for inclusion is anyone who works 1,000 hours a year. Under some circumstances, freelancers working on a 1099 form may be eligible, but in any case, no one who qualifies may be excluded.
How much can I or an employee contribute to a 401(k) each year?
Under this year’s rules (be careful, they could change in the future) someone under 50 can put away up to $17,500 this year; over 50 the limit is $23,000. If you’ve set up a 401(k) plan, you may match up to 3 percent of an employee’s pretax income.
Is there a way to contribute more?
Yes, by setting up a profit-sharing plan, which is sometimes known as a defined contribution plan. If you’re under 50, you can contribute as much as $52,000. If you’re over 50, the limit jumps to $57,500. Under this type of plan, the employee contributes a predetermined portion of his or her earnings (usually pretax) to an individual account, all or part of which is matched by the employer. The contributions are then invested in the stock market or other places and the profits or losses on the investment are credited to the individual’s account. If a business is incorporated, the employer must take a salary to be eligible to participate. If unincorporated, the retirement contribution is based on the business net income (revenue less expenses).
How does borrowing against a 401(k) work?
Members of the plan can borrow $50,000 or 50 percent of the balance, whichever is smaller. The loan must be repaid within five years with interest at the market rate. This cannot be done with an IRA. If employees are eligible to borrow, make sure there is a signed promissory note. Be sure that the employee is making payments on a regular basis. You might want to set up an automatic deduction to be sure the employee doesn’t fall behind. Defined benefit plans may be audited from time to time, so it’s important to carefully follow regulations pertaining to borrowing.
If I make a mistake, will I have to pay a fine?
Forgetting to file a Form 5500, the tax return of the benefit plan can lead to a big fine. In fact, the IRS can fine you as much as $25 a day up to $15,000 while the Department of Labor can fine a business that hasn’t complied as much as $1,100 a day — with no ceiling. There are also penalties for other errors, which is why it is advisable to let a TPA manage your plan and handle the paperwork.