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An Overview of Small Business Pension Plan Options

There are six small business pension plan structures that are recognized by the IRS. For more information about any of these plans, search for publications on the IRS website. Here is an overview of the six plan structures.

  • Simplified Employee Pension Plan - SEP
  • Using a mutual fund company, brokerage firm, bank or other institution, you or your employee open an IRA account. This option must be made available to all full and part- time employees in the company. You, the employer, can make a yearly contribution to each employee's account up to $41,000 - based on a maximum contribution of 25% of the employee's total compensation, up to $205,000. The employee can contribute to his or her personal account up to the current, standard IRA maximum. The employer is not required to make any specific contribution each year.

  • Profit Sharing
  • Using a tailored plan written by an outside administrator, or a packaged plan provided by a mutual fund, bank, brokerage firm, etc., accounts are established for all employees of your company. Employer contributions can be made yearly. Contributions of up to 100% of an employee's compensation can be earmarked for the account. Contributions can be calculated on compensation up to $205,000, and the maximum contribution is $41,000. Only the employer can contribute to a profit sharing account. Employees cannot make contributions. A profit sharing plan is often paired with a SEP or 401K to create an optimized small business pension plan that allows both employers and employees to contribute the maximum contribution possible.

  • Money Purchase Plan
  • This plan is very similar to the basic Profit Sharing plan, described above, but contributions are not tied to profits. Instead, the contribution level is fixed, whether profits are good or bad. This pension structure still exists, but has essentially become obsolete. A more attractive program can be created using a Profit Sharing plan combined with a SEP or 401K plan.

  • 401K Plan
  • Using a tailored plan written by an outside administrator, or a packaged plan provided by a mutual fund, bank, brokerage firm, etc., accounts are established for all employees of your company that choose to participate. Employees can contribute up to $14,000 of their pre-tax salary, and employees over 50 can make an additional "catch-up" contribution of $4,000 per year. The employer can choose to match any portion, up to the full yearly contribution, made by their employees.
  • Savings Incentive Match Plan for Employees - SIMPLE
  • This plan is only available to companies with 100 or fewer employees. The SIMPLE IRA or 401K is designed to be easy for a small employer to implement without outside assistance. Visit the IRS website to download plan instructions and forms. Employees can contribute a maximum of $9,000 of their yearly salary to a SIMPLE IRA of 401K, and eligible employees can also make a maximum catch-up contribution of $1500. Employers must contribute a matching contribution of at least 1% and no more than 3%.

  • Defined Benefit Pension Plan
  • Following a written plan developed by an administrator, pension accounts are established for all employees in the company. The employer then makes quarterly contributions to each account, based on an actuarial formula. These installment contributions are subject to federally imposed funding requirements. The long-term, accrued contribution by the employer is calculated to provide a benefit that is either 100% of the employees' average salary (up to $205,000) for the employees' three, consecutive top-earnings calendar years; or, a maximum of $165,000.

    Keep in mind that your company can implement two or more plans in order to create an economical and attractive small business pension plan, which will help you be competitive in the search for top-tier employees.

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