Business Owner Retirement Plans

Retirement Plan Options For Business Owners

Business owners, who are often burdened with many challenges building and running their businesses, too often miss special retirement plan opportunities available to businesses, instead electing to rely on their personal retirement plans instead. Below are a few options that business owners should consider.

Profit-Sharing Plan (DPSP)

A profit–sharing plan, also known as a deferred profit–sharing plan or DPSP, is a defined contribution plan under which the plan may provide, or the employer may determine, annually, how much will be contributed to the plan (out of profits or otherwise). Under this plan, an employee receives a percentage of a company’s profits based on its quarterly or annual earnings. The plan contains a formula for allocating to each participant a portion of each annual contribution. A profit-sharing plan may include a 401(k) feature.

Simplified Employee Pension Plan (SEPs)

SEP plans are ones in which an employer contributes on a tax-favored basis to IRAs owned by its employees. If the employer meets certain conditions, it isn’t subject to the reporting and disclosure requirements of most retirement plans. One of the distinctive advantages of a SEP plan, is that they can be established in one year and contributions are deductible as late as the due date of income tax returns for the previous year, including extensions.

Per the IRS rules regarding participation, Employees must be included in the SEP plan if they have:

attained age 21;
worked for your business in at least 3 of the last 5 years;
received at least $600 in compensation (in 2016 – 2019) from your business for the year.

Your plan may use less restrictive requirements, for example age 18 or three months of service, to determine which employees are eligible.

Defined Benefit Plans

Also known as a traditional pension plan, Defined Benefit plans promise the participant a specified monthly benefit at retirement. These plans can state an exact dollar amount (e.g. $1000 per month at retirement) with a maximum annual benefit capped at $220,000 (as of 2018) or 100% of the average earned income for the highest three consecutive years, whichever is less. Most often, the benefit amount is calculated through a plan formula that considers such factors as salary and service. Like SEPs, business owners and plan participants can make deductible contributions until the due date of income tax returns for the previous year, including extensions.

Retirement planning can be a daunting task for even the most sophisticated business owners, therefore it is always a good idea to consult a tax professional like those found at TaxPM who can help you review, and if necessary revise your retirement planning strategies.