GOOD NEWS: It turns out that small business owners who put off their employee retirement plans are in the minority.
Last year, half of private companies with fewer than 100 employees contributed to employee retirement funds, along with 83 percent of companies with 500 employers or more, according to the National Bureau of Labor Statistics. IT overall has the third highest rate of any sector, at 89 percent.
Many holdouts are confused about how retirement plans work, according to Rayanne Buchianico, owner of Clearwater, Fla.-based ABC Solutions LLC, an accounting and tax consultancy specializing in IT. MSPs don’t always understand their options, or assume plans are too expensive or difficult to manage, she points out.
Channel pros who recognize the importance of having an exit plan for themselves, however, need to ensure their employees have one as well. “The first time somebody has to write that big check to the IRS, that’s when they really start thinking about tax planning, and retirement plans are a huge part of that,” says Buchianico.
Fortunately, some plans require little management, entail no employer expense, and can be set up online. Contributions are always optional and can change from one year to the next. Whether to contribute a set amount, match employee contributions, or put in nothing at all is entirely up to the employer.
Channel pros have a couple of Individual Retirement Account (IRA) options. A Simplified Employee Pension, or SEP-IRA, lets employers contribute anywhere from 2 percent to 25 percent of their employees’ salaries. Buchianico cautions that if one employee gets a contribution, everyone must, which can become expensive if you have more than a few people working for you.
With a Simple IRA, employers only match the contributions of participating employees. The government caps annual pre-tax contributions at $12,500 for people under 50 and $15,000 for older people, which companies can match dollar-for-dollar up to 3 percent of yearly income.
Timing is important. Some plans require contributions before the close of a tax year, while others can be assigned to—and therefore deducted from—the previous tax year. Employers may finagle some savings through filing tax extensions, says Buchianico, who is skeptical, however, about “creative” or self-directed plans that promise more favorable results. All retirement programs are subject to the same rules, she notes.
Employers often start with small contributions and tend to increase the amount up to the legal maximum, Buchianico says, noting that it becomes a standard business practice. Fortunately, the basic IRA offerings give companies enough flexibility and incentives that their plans can evolve as needed over time.
JENNIFER OLADIPO is a freelance writer in the Greenville, S.C., area.