Home Column Norman G. Grill: Three small-company retirement plans with tax benefits

Norman G. Grill: Three small-company retirement plans with tax benefits

Setting up an employer-sponsored retirement plan can be a smart way to save for your

own retirement, help your employees do the same and possibly reap some tax benefits. On top of that, having a retirement plan can help you with employee recruitment, motivation and retention.

If you are put off by a 401(k) or other plans that involve extensive paperwork and oversight, here are three popular small-business retirement plans that
are far simpler.


This plan was designed with small businesses and self-employed individuals in mind, although other entities also are eligible. With an SEP, your business makes tax-deductible contributions for you and your employees. Employees can’t contribute to their own SEPs. All SEP contributions are made by the business.

SEPs feature relatively high annual contribution limits — the lesser of either $54,000 or 25 percent of salary or 20 percent of allowable self-employment income for 2017. While you must contribute the same percentage of compensation to all SEP accounts, you have the flexibility to change this percentage every year.


This plan is similar to a SEP but there are a couple of key differences. First, eligible employees may contribute to their accounts themselves. And second, the annual contribution limits are lower. Up to $12,500 can be contributed to each employee’s account in 2017 or up to $15,500 for employees age 50 or over. There is also a required match from the employer.

Generally, the employer chooses between matching contributions of up to 3 percent of an employee’s compensation or nonelective contributions of 2 percent of an eligible employee’s compensation.

Most businesses, including self-employed individuals, with up to 100 employees are allowed to establish a SIMPLE IRA. The business’ contributions are tax-deductible and employee contributions are made on a pretax basis. Thus, the payment of taxes is deferred until distributions begin.

You may decide to opt for a SIMPLE 401(k) plan. Although similar to the SIMPLE IRA regarding contribution limits and employer matching, participants in a SIMPLE 401(k) plan may take out loans, which may make this type of
plan preferable.

Under either of the SIMPLE offerings, employers avoid the nondiscrimination tests, a key component of regular 401(k) plans. The test, which involves a calculation based on the organization’s employees, may serve to restrict the allowable contributions of higher-earning employees unless there’s a sufficient level of participation by those earning less.


This plan enables small businesses to reap the same advantages that large companies have typically enjoyed with 401(k) plans, while relaxing much of the costly recordkeeping. And, as with the SIMPLE IRA and SIMPLE 401(k) plans, this plan eliminates the nondiscrimination rules. The contribution limits are the same as the regular 401(k)s: $18,000 plus a $6,000 catch-up for those age 50 and above. For that reason, the safe harbor 401(k) is often preferable to its SIMPLE cousin with the lower contribution limit.

Another key difference from the SIMPLE IRA and SIMPLE 401(k) is in the mandated employer match percentages.

For each of these plans, your business has until the due date of your 2017 tax return, including extensions, to make contributions for tax year 2017. For plans that allow employees to contribute, their deadline is Dec. 31 this year. Different deadlines for setting up the plans apply.

Although these three plans are relatively simple, they can take some expertise to evaluate and set up. So consider seeking the help of a qualified professional.

Norman G. Grill is a certified public accountant and managing partner of Grill & Partners LLC, CPAs and advisers to closely held companies and high-net-worth individuals, with offices in Fairfield and Darien. He can be reached at N.Grill@GRILL1.com or 203- 254-3880.

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