Choosing a Retirement Solution for Your Small Business: IRS Pub. 3998

Retirement Plan Design

Choosing a Retirement Solution for Your Small Business is a joint project of the U.S. Department of Labor’s Employee Ben

Starting a retirement savings plan can be easier than most business owners think. What’s more, there are many retirement programs that provide tax advantages to both employers and employees.
 

Why Save?

Experts estimate that Americans will need 70 to 90 percent of their preretirement income to maintain their current standard of living when they stop working. Now is the time for you and your employees to start planning for retirement. As an employer, you have an important role in helping America’s workers save.
 
By starting a retirement savings plan, you will help your employees save for their future. Retirement plans may also help you attract and retain qualified employees, and they offer tax savings to your business. You will help secure your own retirement as well. You can establish a plan even if you are self-employed.
 

Any Tax Advantages?

A retirement plan has significant tax advantages:
 
  • Employer contributions are deductible from the employer’s income,
  • Employee contributions (other than Roth contributions) are not taxed until distributed to the employee,
  • Money in the plan grows tax-free, and
  • Distributions may be eligible for tax-favored rollovers or transfers into other retirement programs.

Any Other Incentives?

It’s easy to establish a retirement plan that benefits you, your business and your employees, and there are additional incentives for having a plan:
 
  • High contribution limits so you and your employees can set aside large amounts for retirement;
  • “Catch-up” rules that allow employees age 50 and over to set aside additional contributions. The “catch up” amount varies, depending on the type of plan;
  • A tax credit for small employers that enables them to claim a credit for part of the ordinary and necessary costs of starting a SEP, SIMPLE, or certain other types of retirement plans (more on these later). The credit equals 50 percent of the cost to set up and administer the plan, up to a maximum of $500 per year for each of the first 3 years of the plan;
  • A tax credit for certain low- and moderate-income individuals (including self-employed) who make contributions to their plans (“Saver’s Credit”). The amount of the credit is based on the contributions participants make and their credit rate. The maximum contribution eligible for the credit is $2,000. The credit rate can be as low as 10 percent or as high as 50 percent, depending on the participant’s adjusted gross income; and
  • A Roth program that can be added to a 401(k) plan to allow participants to make after-tax contributions into separate accounts, providing an additional way to save for retirement. Distributions upon death
or disability or after age 59 1/2 from Roth accounts held for 5 years, including earnings, are generally tax-free.

A Few Retirement Facts

Most private-sector retirement vehicles are either Individual Retirement Arrangements (IRAs), defined contribution plans, or defined benefit plans.
 
People tend to think of an IRA as something that individuals establish on their own, but an employer can help its employees set up and fund their IRAs. With an IRA, the amount that an individual receives at retirement depends on the funding of the IRA and the earnings (or losses) on those funds.
 
Defined contribution plans are employer-established plans that do not promise a specific benefit at retirement. Instead, employees or their employer (or both) contribute to employees’ individual accounts under the plan, sometimes at a set rate (such as 5 percent of salary annually). At retirement, an employee receives the accumulated contributions plus earnings (or minus losses) on the invested contributions.
Defined benefit plans, on the other hand, promise a specified benefit at retirement, for example, $1,000 a month. The amount of the benefit is often based on a set percentage of pay multiplied by the number of
years the employee worked for the employer offering the plan. Employer contributions must be sufficient to fund promised benefits.
Small businesses may choose to offer IRAs, defined contribution plans, or defined benefit plans. Many financial institutions and retirement plan practitioners make available one or more of these retirement plans that have been pre-approved by the IRS.
 
On the following two pages you will find a chart outlining the advantages of each of the most popular types of IRA-based and defined contribution plans and an overview of a defined benefit plan.
IRA-BASED PLANS
DEFINED CONTRIBUTION PLANS
DEFINED BENEFIT PLANS
 
Payroll Deduction IRA
SEP
SIMPLE IRA Plan
Profit Sharing
Safe Harbor 401(k)
Automatic Enrollment 401(k)
Traditional 401(k)
Key Advantage
Easy to set up and maintain.
Easy to set up and maintain.
Salary reduction plan with little administrative paperwork.
Permits employer to make large contributions for employees.
Permits high level of salary deferrals by employees without annual nondiscrimination testing.
Provides high level of participation and permits high level of salary deferrals by employees. Affords safe harbor relief for default investments.
Permits high level of salary deferrals by employees.
Provides a fixed, pre-established benefit for employees.
Employer Eligibility
Any employer with one or more employees.
Any employer with one or more employees.
Any employer with 100 or fewer employees that does not currently maintain another
Any employer with one or more employees.
Any employer with one or more employees.
Any employer with one or more employees.
Any employer with one or more employees.
Any employer with one or more employees.
 
 
 
retirement plan.
 
 
 
 
 
Employer’s
Role
Arrange for employees to make payroll deduction contributions. Transmit contributions for
May use IRS Form 5305- SEP to set up the plan. No annual filing requirement for
May use IRS Form 5304-SIMPLE or 5305-SIMPLE to set up
the plan. No annual filing
No model form to establish this plan. May need advice from a financial institution or employee
No model form to establish this plan. May need advice from a financial institution or employee benefit
No model form to establish this plan. May need advice from a financial institution or employee benefit adviser.
No model form to establish this plan. May need advice from a financial institution or employee benefit adviser.
No model form to establish this plan. Advice from a financial institution or employee benefit adviser would
 
employees to IRA. No annual
employer.
requirement for employer. Bank
benefit adviser. Must file annual
adviser. A minimum amount of
May require annual nondiscrimination
Requires annual nondiscrimination
be necessary. Must file annual Form
 
filing requirement for employer.
 
or financial institution handles
Form 5500.
employer contributions is required.
testing to ensure that plan does not
testing to ensure that plan does
5500. An actuary must determine
 
 
 
most of the paperwork.
 
Must file annual Form 5500.
discriminate in favor of highly
not discriminate in favor of highly
annual contributions.
 
 
 
 
 
 
compensated employees. Must file annual
compensated employees. Must file annual
 
 
 
 
 
 
 
Form 5500.
Form 5500.
 
Contributors To The Plan
Employee contributions remitted through payroll deduction.
Employer contributions only.
Employee salary reduction contributions and employer contributions.
Annual employer contribution is discretionary.
Employee salary reduction contributions and employer contributions.
Employee salary reduction contributions and maybe employer contributions.
Employee salary reduction contributions and maybe employer contributions.
Primarily funded by employer.
Maximum Annual Contribution
(per participant)
$6,000 for 2020 and for 2021. Participants age 50 or over can make additional contributions up to $1,000.
Up to 25% of compensation(1) but no more than $57,000 for 2020 and $58,000 for 2021.
Employee: $13,500 in 2020 and in 2021. Participants age 50 or over can make additional contributions up to $3,000 in 2020 and in 2021.
 
Employer: Either match
Up to the lesser of 100% of compensation(1) or $57,000 for 2020 and $58,000 for 2021.
Employer can deduct amounts that do not exceed 25% of aggregate compensation for all participants.
Employee: $19,500 in 2020 and in 2021. Participants age 50 or over can make additional contributions up to
$6,500 in 2020 and in 2021.
 
Employer/Employee Combined:
Up to the lesser of 100% of
Employee: $19,500 in 2020 and in 2021. Participants age 50 or over can make additional contributions up to $6,500 in 2020 and in 2021.
 
Employer/Employee Combined: Up to the lesser of 100% of compensation(1)
Employee: Employee: $19,500 in 2020 and in 2021. Participants age 50 or over can make additional contributions up to
$6,500 in 2020 and in 2021.
 
Employer/Employee Combined: Up to the lesser of 100% of compensation(1)
Annually determined contribution.
See the
for annual updates
 
 
employee contributions 100% of first 3% of compensation (can
be reduced to as low as 1% in
 
compensation(1) or $57,000 for 2020
and $58,000 for 2021. Employer can deduct (1) amounts that do
or $57,000 for 2020 and $58,000 for 2021. Employer can deduct (1) amounts
that do not exceed 25% of aggregate
or $57,000 for 2020 and $58,000 for 2021. Employer can deduct (1) amounts
that do not exceed 25% of aggregate
 
 
 
 
any 2 out of 5 yrs.); or contribute
 
not exceed 25% of aggregate
compensation for all participants and (2)
compensation for all participants and (2)
 
 
 
 
2% of each eligible employee’s
 
compensation for all participants and
all salary reduction contributions.
all salary reduction contributions.
 
 
 
 
compensation.2
 
(2) all salary reduction contributions.
 
 
 
Contributor’s
Options
Employee can decide how much to contribute at any time.
Employer can decide whether to make contributions year-to- year.
Employee can decide how much to contribute. Employer must make matching contributions
or contribute 2% of each employee’s compensation.
Employer makes contribution as set by plan terms.
Employee can decide how much to contribute based on a salary
reduction agreement. The employer must make either specified matching contributions or a 3% contribution to all participants.
Employees, unless they opt otherwise, must make salary reduction contributions specified by the employer. The employer can make additional contributions, including matching contributions as set by plan terms.
Employee can decide how much to contribute based on a salary reduction agreement. The employer can make additional contributions, including matching contributions as set by plan terms.
Employer generally required to make contribution as set by plan terms.
Minimum Employee Coverage Requirements
There is no requirement. Can be made available to any employee.
Must be offered to all employees who are at least 21 years old, employed by the employer for 3 of the last 5 years and had compensation of
$600 for 2020 and $650 for 2021.
Must be offered to all employees who have compensation of at least $5,000 in any prior 2 years, and are reasonably expected
to earn at least $5,000 in the current year.
Generally, must be offered to all employees at least 21 years old who worked at least 1,000 hours in a previous year.
Generally, must be offered to all employees at least 21 years old who worked at least 1,000 hours in a previous year.
Generally, must be offered to all employees at least 21 years old who worked at least 1,000 hours in a previous year.
Generally, must be offered to all employees at least 21 years old who worked at least 1,000 hours in a previous year.
Generally, must be offered to all employees at least 21 years old who worked at least 1,000 hours in a previous year.
Withdrawals,
Loans & Payments
Withdrawals permitted anytime subject to federal income taxes; early withdrawals subject to
an additional tax (special rules apply to Roth IRAs). Participant loans are not permitted.
Withdrawals permitted anytime subject to federal income taxes; early withdrawals subject to
an additional tax. Participants cannot take loans from their SEP–IRAs.
Withdrawals permitted anytime subject to federal income taxes; early withdrawals subject to
an additional tax. Participants cannot take loans from their SIMPLE IRAs.
Withdrawals permitted after a specified event occurs (retirement, plan termination, etc.) subject
to federal income taxes. Plan may permit loans and hardship withdrawals; early withdrawals subject to an additional tax.
Withdrawals permitted after a specified event occurs (retirement, plan termination, etc.) subject
to federal income taxes. Plan may permit loans and hardship withdrawals; early withdrawals subject to an additional tax.
Withdrawals permitted after a specified event occurs (retirement, plan termination, etc.) subject to federal income taxes. Plan may permit loans and hardship withdrawals; early withdrawals subject to an additional tax.
Withdrawals permitted after a specified event occurs (retirement, plan termination, etc.) subject to federal income taxes. Plan may permit loans and hardship withdrawals; early withdrawals subject to an additional tax.
Payment of benefits after a specified event occurs (retirement, plan termination, etc.). Plan may permit loans; early withdrawals subject to an additional tax.
Vesting
Contributions are immediately 100% vested.
Contributions are immediately 100% vested.
All contributions are immediately 100% vested.
May vest over time according to plan terms.
Employee salary reduction contributions and all safe harbor employer contributions are immediately 100% vested. Some employer contributions may vest over time according to plan terms.
Employee salary reduction contributions are immediately 100% vested. Employer contributions may vest over time according to plan terms.
Employee salary reduction contributions are immediately 100% vested. Employer contributions may vest over time according to plan terms.
May vest over time according to plan terms.

Defined Contribution Plans

Profit Sharing

Safe Harbor 401(k)
Automatic Enrollment 401(k)
Traditional 401(k)
Permits employer to make large contributions for employees.

Permits high level of salary deferrals by employees without annual nondiscrimination testing.
Provides high level of participation and permits high level of salary deferrals by employees. Affords safe harbor relief for default investments.
Permits high level of salary deferrals by employees.
Any employer with one or more employees.

Any employer with one or more employees.
Any employer with one or more employees.
Any employer with one or more employees.
 

 
 
 
No model form to establish this plan. May need advice from a financial institution or employee

No model form to establish this plan. May need advice from a financial institution or employee benefit
No model form to establish this plan. May need advice from a financial institution or employee benefit adviser.
No model form to establish this plan. May need advice from a financial institution or employee benefit adviser.
benefit adviser. Must file annual

adviser. A minimum amount of
May require annual nondiscrimination
Requires annual nondiscrimination
Form 5500.

employer contributions is required.
testing to ensure that plan does not
testing to ensure that plan does
 

Must file annual Form 5500.
discriminate in favor of highly
not discriminate in favor of highly
 

 
compensated employees. Must file annual
compensated employees. Must file annual
 

 
Form 5500.
Form 5500.
Annual employer contribution is discretionary.

Employee salary reduction contributions and employer contributions.
Employee salary reduction contributions and maybe employer contributions.
Employee salary reduction contributions and maybe employer contributions.
Up to the lesser of 100% of compensation(1) or $57,000 for 2020 and $58,000 for 2021.
Employer can deduct amounts that do not exceed 25% of aggregate compensation for all participants.

Employee: $19,500 in 2020 and in 2021. Participants age 50 or over can make additional contributions up to
$6,500 in 2020 and in 2021.
 
Employer/Employee Combined:
Up to the lesser of 100% of
Employee: $19,500 in 2020 and in 2021. Participants age 50 or over can make additional contributions up to $6,500 in 2020 and in 2021.
 
Employer/Employee Combined: Up to the lesser of 100% of compensation(1)
Employee: Employee: $19,500 in 2020 and in 2021. Participants age 50 or over can make additional contributions up to
$6,500 in 2020 and in 2021.
 
Employer/Employee Combined: Up to the lesser of 100% of compensation(1)
 

compensation(1) or $57,000 for 2020
and $58,000 for 2021. Employer can deduct (1) amounts that do
or $57,000 for 2020 and $58,000 for 2021. Employer can deduct (1) amounts
that do not exceed 25% of aggregate
or $57,000 for 2020 and $58,000 for 2021. Employer can deduct (1) amounts
that do not exceed 25% of aggregate
 

not exceed 25% of aggregate
compensation for all participants and (2)
compensation for all participants and (2)
 

compensation for all participants and
all salary reduction contributions.
all salary reduction contributions.
 

(2) all salary reduction contributions.
 
 
Employer makes contribution as set by plan terms.

Employee can decide how much to contribute based on a salary
reduction agreement. The employer must make either specified matching contributions or a 3% contribution to all participants.
Employees, unless they opt otherwise, must make salary reduction contributions specified by the employer. The employer can make additional contributions, including matching contributions as set by plan terms.
Employee can decide how much to contribute based on a salary reduction agreement. The employer can make additional contributions, including matching contributions as set by plan terms.
Generally, must be offered to all employees at least 21 years old who worked at least 1,000 hours in a previous year.

Generally, must be offered to all employees at least 21 years old who worked at least 1,000 hours in a previous year.
Generally, must be offered to all employees at least 21 years old who worked at least 1,000 hours in a previous year.
Generally, must be offered to all employees at least 21 years old who worked at least 1,000 hours in a previous year.
Withdrawals permitted after a specified event occurs (retirement, plan termination, etc.) subject
to federal income taxes. Plan may permit loans and hardship withdrawals; early withdrawals subject to an additional tax.

Withdrawals permitted after a specified event occurs (retirement, plan termination, etc.) subject
to federal income taxes. Plan may permit loans and hardship withdrawals; early withdrawals subject to an additional tax.
Withdrawals permitted after a specified event occurs (retirement, plan termination, etc.) subject to federal income taxes. Plan may permit loans and hardship withdrawals; early withdrawals subject to an additional tax.
Withdrawals permitted after a specified event occurs (retirement, plan termination, etc.) subject to federal income taxes. Plan may permit loans and hardship withdrawals; early withdrawals subject to an additional tax.
May vest over time according to plan terms.

Employee salary reduction contributions and all safe harbor employer contributions are immediately 100% vested. Some employer contributions may vest over time according to plan terms.
Employee salary reduction contributions are immediately 100% vested. Employer contributions may vest over time according to plan terms.
Employee salary reduction contributions are immediately 100% vested. Employer contributions may vest over time according to plan terms.




Choosing a Retirement Solution for Your Small Business is a joint project of the U.S. Department of Labor’s Employee Benefits Security Administration (EBSA) and the Internal Revenue Service.
To view the original IRS booklet, visit: https://www.irs.gov/pub/irs-pdf/p3998.pdf
This booklet constitutes a small entity compliance guide for purposes of the Small Business Regulatory Enforcement Fairness Act of 1996. It does not constitute legal, accounting, or other professional advice.

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fits Security Administration (EBSA) and the Internal Revenue Service.

Article ID: 97, , Modified: 8/18/2021 at 10:59 AM

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