Small Business Connections                                    December 2011

Choosing a Retirement Solution for Your Small Business

Starting a retirement savings plan can be easier than most business owners think. What's more, there are a number of retirement programs that provide tax advantages to both employers and employees.

Why Save?

Experts estimate that Americans will need 70 to 90 percent of their preretirement income to maintain their current standard of living when they stop working. So now is the time to look into retirement plan programs. As an employer, you have an important role to play in helping America's workers save.

By starting a retirement savings plan, you will help your employees save for the future. Retirement plans may also help you attract and retain qualified employees, and they offer tax savings to your business. You will help secure your own retirement as well. You can establish a plan even if you are self-employed.

Any Tax Advantages?

A retirement plan has significant tax advantages: Employer contributions are deductible from the employer's income, employee contributions (other than Roth contributions) are not taxed until distributed to the employee, and money in the plan grows tax-free.

Any Other Incentives?

In addition to helping your business, your employees and yourself, it is easy to establish a retirement plan, and there are additional reasons for doing so:

• High contribution limits so your employees (and you) can set aside large amounts for retirement;
• "Catch-up" rules that allow employees aged 50 and over to set aside additional contributions. The amount varies, depending on the type of plan;
• Tax credit for small employers that would enable them to claim a tax credit for part of the ordinary and necessary costs of starting a SEP, SIMPLE, or certain other types of plans. The credit equals 50 percent of the cost to set up and administer the plan, up to a maximum of $500 per year for each of the first 3 years of the plan;
• Tax credit for certain low-and moderate-income individuals (including self-employed) who make contributions to their plans ("Saver's Credit"). The amount of the credit is based on the contributions participants make and their credit rate. The maximum contribution eligible for the credit is $2,000. The credit rate can be as low as 10 percent or as high as 50 percent, depending on the participant's adjusted gross income; and
• A Roth 401(k) program that can be added to a 401(k) plan to allow participants to make after-tax contributions into separate accounts, providing an additional way to save for retirement. Distributions upon death or disability or after age 59½ from Roth accounts held for 5 years, including earnings, are generally tax-free.

Retirement plan options include Payroll Deduction IRA's, Simplified Employee Pensions (SEPs), SIMPLE IRA Plans, and 401(k) Plans.  

The U.S. Department of Labor's Employee Benefits Security Administration (EBSA) enforces and administers the Employee Retirement Income Security Act of 1974 (ERISA). For publications, an interactive website, a video and more on the topics addressed in this article, visits EBSA's website at www.dol.gov/ebsa.

EBSA also provides information that will assist employers and employee benefit plan officials in understanding and complying with the requirements of ERISA as it applies to the administration of employee retirement, health and other welfare benefit plans as well as information for your employees about the importance of saving for retirement. If you have questions, contact us electronically at www.askebsa.dol.gov or by calling toll-free at (866) 444-3272.

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