Providing benefits has evolved beyond just being a perk used to recruit new employees. A competitive benefits package may make it easier to recruit qualified candidates and retain valued employees. Benefits also show a small business owner’s commitment to supporting employees.
Retirement plans are available for a small business owner with only a few employees and for a business owner who wants to manage a growing company with hundreds of employees. There’s a retirement plan that you could consider, if it fits your needs. You may offer your employees a way to save for retirement, manage finances, and potentially gain tax benefits for your business and as a business owner.
Why Offer a Retirement Plan?
No matter the size of a company, a retirement benefits plan is one of the top considerations for employees when evaluating a workplace. While many employees want competitive pay, they also seek employers who offer benefits that could also contribute to their long-term financial wellness.
Offering a retirement plan may help your business in these ways1:
- Attract qualified candidates
- Help retain valuable employees
- Encourage long-term employee loyalty
- Support your employees’ financial wellness
- Gain tax benefits for your business
- Help you save for retirement as a business owner
What's more, there's been an increase in the number and types of tax credits and incentives for small businesses offering retirement plans. If your business has considered offering a retirement plan in the past but didn't do it, now may be the perfect time to revisit your options.
Consider Your Business’s Needs
Remember that there is no single plan that fits every business. Your plan may depend on the number of employees you have, your business structure, and your annual revenue and cash flow. You also want to consider your administrative resources and future plans.
Types of Retirement Plans for Small Businesses
Small business owners have many choices to consider when offering a retirement plan for employees and also for managing their personal retirement plans. For employees, the retirement plans to choose from include SEP IRA, SIMPLE IRA, traditional 401(k), Safe Harbor 401(k), and profit-sharing plans. For the business owner and perhaps high-value key employees, there are cash balance plans.
SEP IRA
A Simplified Employee Pension (SEP) IRA is one of the easiest retirement plans for small businesses to administer.
A SEP IRA has these characteristics:
- Only employers make contributions to the plan
- Contributions may change year over year
- Administrative work is modest
- Employees are not required to contribute any payroll deductions
SEP IRAs are worth considering for sole proprietors, partners, family-owned businesses, and businesses with only a few employees. Flexible contribution levels are possible for businesses with variable income year-over-year.
SIMPLE IRA
A Savings Incentive Match Plan for Employees (SIMPLE) IRA allows employers and employees to contribute to their retirement savings. SIMPLE IRAs require less administrative work than other qualified plans and allow employees to contribute through payroll deductions.
As an employer, your requirement is to provide either matching contributions or non-elective contributions each year. This makes SIMPLE IRAs worth considering for businesses that plan to contribute each year, but not an appropriate option for businesses with very cyclical cash flow.
SIMPLE IRAs may be good for smaller businesses that want their employees to contribute but also want to keep administrative requirements low.
Traditional 401(k)
Traditional 401(k) plans are popular among employees and remain one of the most common retirement plans for businesses of all sizes. A traditional 401(k) allows for employee salary deferrals, employer matching contributions, and profit-sharing contributions. It also allows higher annual contribution limits than some other retirement plans.
Employers may customize almost every aspect of their plan, including eligibility requirements, matching contributions, vesting schedules, and investment opportunities. If you’re looking for flexibility and plan to offer your employees a competitive benefits package, a traditional 401(k) may be a possibility for you.
Safe Harbor 401(k)
An issue some businesses may experience with traditional 401(k) plans is the annual nondiscrimination test. This test is designed to make sure that your business's retirement plan doesn't favor highly compensated employees (HCEs) to the exclusion of other employees.
A Safe Harbor 401(k) may eliminate the need for this yearly testing. When implementing a Safe Harbor provision, your business is required to make employer contributions. In return, your business may avoid the annual testing requirement. Safe Harbor 401(k) plans are for businesses that want to increase the contributions for business owners and high-level executives while limiting the administrative requirements and ensuring they pass yearly testing.
Profit-Sharing Retirement Plans
Employers may make annual contributions to a profit-sharing plan. The contributions are made at the discretion of your business and often depend on how your business performs that year. Profit-sharing plans are different from bonus programs because the money is deposited directly into employees’ retirement accounts. One of the biggest advantages of profit-sharing plans is their flexibility.
Cash Balance Plans
If your business is highly profitable and your primary concern as the business owner is your ability to save for your retirement, a cash balance plan may be an option you want to consider. Cash balance plans are a type of defined benefit plan (like a pension). They let you save considerably more than typical defined-contribution plans.
Your business’s cash flow helps determine your contribution levels. These plans may work for businesses with steady, predictable income streams. They are more complex to set up and maintain than other types of retirement plans, so you want to consult with a knowledgeable financial professional.
In Closing
Investment selection isn’t the only thing to consider when offering a retirement plan. Working with a knowledgeable financial professional and retirement plan administrator may help you set up whatever plan you choose.
To get started, check out our business planning checklist to learn more about options for retirement plans. Access the checklist here.
Important Disclosures:
This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal or investment advice. If you are seeking investment advice specific to your needs, such advice services must be obtained on your own separate from this educational material.
This article was prepared by WriterAccess
LPL Tracking #1157260-06
Footnotes
1 Benefits of setting up a retirement plan
https://www.irs.gov/retirement-plans/plan-sponsor/benefits-of-setting-up-a-retirement-plan