What You Need to Know About Retirement Programs for Your Corporation

A variety of basic retirement plans are available to corporations. These plans create tax advantages as well as attract and reward valuable employees. A corporation receives a tax deduction for contributions to employee retirement accounts. This includes amounts that the corporation contributes to the retirement plan for an officer shareholder. The most popular retirement plans are “defined contribution plans”, which are designed to meet specific sections of the income tax code.

One type of defined contribution plan is a profit sharing plan. Contrary to its name, contributions are not actually determined from a corporation’s profit. These plans are designed for employer contributions only. But there is no fixed contribution amount. Contributions are based upon a formula that meets requirements of the tax code. The corporation may choose to suspend contributions in one year and resume the next year. 

A common profit sharing plan is a 401(k), which is named after a particular section of the tax code containing the rules for these plans. A 401(k) may permit employees to contribute to their retirement plan accounts with payroll deductions. Employees are not taxed on income they contribute to a profit sharing plan or amounts contributed by employers to their retirement accounts. Instead, employees only pay income tax upon future withdrawal from their accounts during retirement.

Small corporations with profit sharing plans, such as a 401(k), normally contract with a retirement services company to help administer the plan. Consequently, there are annual fees associated with these plans and some complexities in determining contributions.

However, there are plans for small corporations that are easier to administer and generally require no fees to create or maintain. One such plan is a SIMPLE. These plans are available for companies with fewer than one hundred employees. When establishing a SIMPLE, an IRA is created for each participating employee. The maximum annual contribution amount to a SIMPLE is lower than the limit for profit sharing plans.

There are two options for employer contributions to a SIMPLE plan. The first choice is matching of employee contributions up to three percent of compensation. The amount of company contribution for any employee is therefore determined by whether the employee defers compensation to his IRA via payroll deduction. The company can choose to stop making any matching contributions in one year and begin such contributions again in the subsequent year. The second choice for employer contributions is remitting two percent of compensation to the accounts of all eligible employees, regardless of employee contributions. Under this method the employer’s contributions are non-elective and required every year.

Another low-cost employer retirement program for a small corporation is a SEP. Every participating employee in a SEP has an IRA. Contributions are entirely from the employer; there are none from the employee.

The contributions are determined from multiplying each eligible employee’s annual compensation by the same percentage for everyone. The maximum annual contribution amount for each employee is the same as profit sharing plans. However, SEP contributions cannot exceed twenty-five percent of compensation. Therefore, contributions to SEP accounts can be lower than contributions to accounts under a profit sharing plan.