What Retirement Plans Can My Small Business Offer to Employees?
Jun 6, 2024
3 min read
If you are a small business owner, offering retirement benefits to your employees may help you attract and retain talented employees. There are a variety of options for you to choose from.
Why Offer a Retirement Plan to Your Employees?
Offering retirement plans as part as a benefit package for your small business goes a long way in retaining your current employees and recruiting new talent to your business. According to SCORE, 94% of small businesses currently offering retirement benefits said retirement benefits help drive recruitment.
Not only can you offer plans to your employees, you can also access retirement benefits yourself. Plus, you may be able to access certain benefits for offering retirement plans, such as tax credits and deductions. Plans vary in ease of set up, but once started are generally easy to maintain, and some plans are very flexible for your business.
What to Consider When Choosing a Small Business Retirement Plan
There are many factors to think about, such as the structure of your business, number of employees, contribution limits and other costs associated with setting up and maintaining a plan. Number of employees is a critical consideration, as some plans are only available to businesses of certain sizes. Factors such as administration fees, employee participation, third party contracts and risk can make selecting the right plan hard for small business owners. Knowing the advantages and disadvantages of each plan is helpful when thinking about what works best for your business.
Small Business Retirement Plan Options
There are many different types of retirement plans, such as PEP 401k, SIMPLE IRA, SEP IRA, and profit-sharing plans. Each plan has unique advantages and disadvantages, so you have the opportunity to weigh which options are most pertinent to your business. Before you choose which plan to set in place, make sure you consider flexibility and the future of both your business and your employees
Traditional 401(k)
Traditional 401k plans for small businesses are set up by a financial institution. These plans are fairly flexible; contributions can be invested into stocks, bonds and many other investment vehicles. Employees can contribute pretax dollars from their earned wages, which you can choose to match.
The disadvantage of the plan is not all employees can be automatically added if they are under 21 or have less than a year of service. An advantage for your participants is that if they terminate their employment, they can take their contributions with them.
There may be certain responsibilities you will need to maintain in operating the plan. You can hire a professional to manage the plan and take care of administrative tasks associated, though that does add an employee to your payroll.
PEP 401(k)
A pooled employer plan (PEP) plan is a great way for small businesses to participate in a retirement plan without being the sole proprietor of a retirement account. Initiated under the SECURE Act, part time and full-time employees may participate. Using a pooled plan provider as the fiduciary, unrelated businesses all contribute to a plan. The fiduciary has discretion over investments and administration of the plan.
This type of plan puts less of an administrative burden on businesses. Some fiduciaries may also provide external benefits, such as financial or wellness planning for employees, as an added benefit. For the first three years of plan participation, employers may be able to claim up to $5,000 in tax credit.
However, because a third party is managing the investments, business owners have little control. There may also be higher fees, and some PEP contracts can include provisions that make it more difficult or expensive to withdraw.
SIMPLE IRA
SIMPLE IRA is an acronym for Savings Incentive Match Plan for Employees. Simple IRA’s are for small businesses with 100 employees or fewer and can be easily set up through a financial institution. SIMPLE IRAs can be invested into stocks, bonds and mutual funds but are always vested. Employees may elect to contribute to be a part of the program, and as their employer you can match up to 3% of the employee’s compensation. Employees can make tax-deferred contributions through payroll deductions. Employees who are over 50 can make catch-up contributions, and the amount employees can contribute is adjusted annually based on cost-of-living analysis.
SIMPLE IRAs are an appealing option not only because of the savings structure, but also because business owners are not required to file financial reports.
You can terminate the plan if you find it is not working for your small business, however there may be a two-year waiting period.
SEP IRA
A SEP IRA, or Simplified Employee Pension, is a low cost option that is easy to set up. You determine how much you want to contribute to your plan and your employees plan; employees are not able to choose how much they contribute. You must allot the same amount into both your account and your employees’ accounts, which is why SEP IRAs are commonly used for those who are self-employed.
SEP IRAs have many advantages, such as lower operating costs and tax advantages. There is no minimum annual contribution limit as an employer, and you do not have to file any documentation with the government.
A disadvantage is that they are employer only contributions, and once you offer this program, you cannot switch plans. Additionally, there are no catch-up contributions for those over 50 years of age, limiting the amount you can put away using a SEP IRA.
How to Set Up a Retirement Plan for Your Business
- Evaluate your financial situation and determine your goals
- Meet with a professional to review your options
- Enroll in your plan, ensuring you have recordkeeping set up
- Provide information to employees
- Set up contributions
- Comply with all regulatory requirements and complete yearly reviews
Whether you need help getting a plan in place or discussing your options – a Farm Bureau agent or financial advisor can help.