As a business owner, one of your biggest challenges is attracting and retaining quality employees. One smart way to meet this challenge is to offer a retirement plan.

The SIMPLE IRA (Savings Incentive Match Plan for Employees of Small Employers Individual Retirement Account) and the 401(k) plan are two retirement plans to consider. Both feature salary deferrals from your employees with matching contributions from you. The key is choosing the plan that is best suited to your tax situation, company size and company growth plans.

SIMPLE IRA

Eligibility for Establishing a SIMPLE IRA

The SIMPLE IRA provides an alternative to a 401(k) plan for owners of small businesses.

  • Designed for any employer, including corporations, partnerships, sole proprietorships, independent contractors and self-employed individuals.
  • Employers with no more than 100 employees who each earned at least $5,000 during the prior year.1
  • Employer is not currently making contributions to any other employer-sponsored retirement plan during the calendar year in which the SIMPLE IRA is maintained.

Employer Contribution Requirement

Employers are required to meet one of the following contribution requriements:
  • Match contributions dollar for dollar, up to 3% of an employee's compensation, or
  • Contribute a flat 2% of each eligible employee's compensation2

Employee Contributions

  • Eligible employees may make pretax salary deferrals of up to $12,000 for 2014. Employees age 50 and older may be able to make an additional "catch-up" contribution of $2,500 in 2014.
  • Employees can withdraw money penalty-free beginning on the day they turn 59½. The employer may specify whether or not employees can take withdrawals while they are still employed.

Vesting

  • Employees are immediately vested in all contributions in their accounts.

Administration

  • No annual discrimination tests.
  • No annual tax reporting other than employee W-2 forms.

Legal requirements

  • You must notify your employees that your company has established a SIMPLE IRA plan.
  • You must allow employees 60 days to enroll in the plan.
  • You must provide employees with copies of any amendments made to the plan.
  • You must provide employees with a model notification 60 days prior to the start of the plan year. The notification states whether you will give employees a 3% match or a 2% non-elective contribution.
  • You must deposit all contributions for an employee within 30 days following the end of the month in which it is deferred.

Considerations

  • You can establish a SIMPLE IRA as long as you do not offer any other retirement plan such as a 401(k), SEP IRA or profit sharing plan.
  • If you already have another retirement plan but want to offer a SIMPLE IRA, you must terminate your current plan and start a new SIMPLE IRA plan.
  • Contributions made to employee accounts are a tax-deductible business expense.

401(k) Plans

The 401(k) plan is the most well-known and widely used employer-sponsored retirement plan in the United States.

  • No limit on number of plan participants.

Employer Contributions

  • You may choose to match employee contributions in a 401(k) plan on either a dollar-for-dollar basis up to 25% in 2014, but a match isn't required.

Employee Contributions

  • Employees can make pretax salary deferrals of up to $17,500 for 2014. Employees age 50 and older may be able to make an additional "catch-up" contribution of $5,500 in 2014.
  • Earnings grow tax deferred until withdrawn.
  • Employees can withdraw money penalty-free beginning on the day they turn 59½. The employer may specify whether or not employees can take withdrawals while they are still employed.

Combined Employer and Employee Contributions

  • Combined contributions for 2014 can be up to 100% of compensation or $52,000, whichever is less (excluding "catch-up" contributions).2

Vesting

  • Employers can establish a vesting schedule if they choose.
  • There is a legal minimum for a vesting schedule of five or seven years. If the plan is top heavy, it's three or six years.

Administration

  • A 401(k) plan involves more administration than a SIMPLE IRA, including annual tax reporting, a discrimination test and loan tracking.
  • Businesses may hire a plan provider or administrator to assist with the administration of the plan. Employers may incur set-up expenses.

Legal Requirements

  • Reports must be filed each year with the Internal Revenue Service, the U. S. Department of Labor and the Pension Benefit Guaranty Corporation.
  • Other reports must be furnished to plan participants and their beneficiaries.

Your business challenges you to find better ways to offer products or services to your customers. Offering a retirement plan can help you attract and retain the quality employees you need to meet your business goals.


Questions & Answers

What is a 401(k) discrimination test?

  • A discrimination test is a periodic evaluation of contribution levels, which limits the amount in which a highly compensated employee can benefit compared to other employees in a 401(k) Plan.

What does an "eligible" employee mean for a SIMPLE IRA?

  • Employee eligibility for plan participation may be based on factors such as years of service and compensation. Employees are eligible if they receive at least $5,000 in compensation from the employer during any two preceding calendar years. The employee also must be reasonably expected to receive at least $5,000 of compensation in the current calendar year. The employer may adopt more liberal eligibility requirements.

1For purposes of determining the 100 employee limitation, all employees employed at any time during the calendar year are taken into account, regardless of whether they are eligible to participate.
2For 2014, contributions may only be based on the first $260,000 of compensation, as adjusted.

IRS Circular 230 Disclosure: American Century Companies, Inc. and its affiliates do not provide tax advice. Accordingly, any discussion of U.S. tax matters contained herein (including any attachments) is not intended or written to be used, and cannot be used, in connection with the promotion, marketing or recommendation by anyone unaffiliated with American Century Companies, Inc. of any of the matters addressed herein or for the purpose of avoiding U.S. tax-related penalties.

This information is for educational purposes only and not intended as tax advice. Please consult your tax advisor for more detailed information or for advice regarding your individual situation.

Federal contribution limits are listed on this page. Some states and localities may have tax, community property or other laws that are different from the federal laws.