Lots of small business owners agree that retirement plans are an important tool for finding and retaining employees.
Retirement savings plans are one of the most highly requested benefits among job seekers and job holders concerned about their future. Companies offering a competitive retirement plan attract some of the 81 percent of job seekers who say these benefits are a significant factor in their job search. Plus, they can avoid losing some of the 49 percent of jobholders who would apply elsewhere because they're unhappy with their benefits programs.
With all these advantages, you may be interested in helping your team members save up for their retirement years. If so, read on.
What is a retirement savings plan?
A retirement savings plan is an account set up by an employer or employee to cover post-career living expenses. Participants can access the funds that are invested when they reach a defined age. And, in some cases, those funds can be accessed sooner if a participant is willing to pay a penalty.
Is my small business required to provide retirement plans?
In some states, and in some cases, yes. Many states have passed or are pressing for new laws that affect small business owners.
For instance, as of June 30, 2022, California businesses with five or more employees must now provide access to access to CalSavers or a private retirement plan.
Virginia plans to launch a similar plan for employers up and running for two or more years who have 25 or more employees. VirginiaSaves will launch mid-2023.
Oregon employers must now implement OregonSaves or offer a qualified retirement plan to their employees. In late 2022, employers with four or fewer employers will also need to meet this requirement.
And New York recently passed a law requiring employers with at least 10 New York-based workers in the prior year to enroll in its state program or offer a qualified retirement program. The program is not yet up and running.
Elsewhere, Massachusetts has an active requirement. Illinois and Colorado have passed legislation and have set deadlines for enrollment. And states like Connecticut and New Jersey will soon have firm deadlines.
In all, nearly all the 48 contiguous states (except Alabama, Delaware, Florida, Mississippi, and South Dakota) have implemented or are exploring new requirements. But soon, all 50 could have programs in place.
Check out this resource to learn more:
What are my employees looking for in a plan?
When new plans rollout, employees often want to know the answers to these questions:
- Whether you'll make or match contributions to their plan
- Whether the money can be accessed early
- How contributions or plan withdrawals affect their taxes
- Whether mandatory withdrawals are required
- Whether they can continue to contribute after reaching retirement age
- How a plan can work into their estate plans
- Whether a plan will accept rollovers
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Want to ensure your plan is effective? Factor in your employees’ needs and preferences. You might survey your employees to find out which points matter most before choosing a plan. |
What kinds of retirement plans can I offer?
There are eight popular plans you may want to explore:
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A 401(k) plan allows you and your employee to contribute to the employee’s retirement. Employee contributions are treated as deferrals of income. Taxes aren’t incurred until the employee takes a distribution.
Does my business qualify?Businesses of any size can qualify, including those that have other retirement plans in place.
What makes this plan a great choice?Employers can make contributions over a period of time rather than parting with a lump sum all at once.
There are many more benefits for employees:
What are the drawbacks?Administration can cause some headaches for employers. The costs of 401(k) administration are often higher than in other plans, and the options for loans and withdrawals can make administration a bit complex. Plus, employers may need to prove that the benefits they offer don’t favor highly paid employees over those in lower pay grades. This point, specifically, can be challenging to test and verify.
For employees, the main drawback is that employer contributions may vest on a schedule. If employees resign or are fired before the funds fully vest, they could miss out on a portion of that income.
What are the contribution limits?In 2021, total contributions could not exceed $19,500 per employee for those age 49 or younger. Total contributions could not exceed $26,000 per employee for people who are 50 or older.
Will I need to complete any other filings?You will need to file Form 5500 each year. |
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A SIMPLE 401(k) plan is like a 401(k) plan in that employees can defer a portion of their compensation to use post-career. However, three features make this plan unique:
Does my business qualify?Businesses with 100 or fewer employees can establish SIMPLE 401(k) plans as long as they have no other retirement plans in place.
What makes this plan a great choice?The administration of these plans is easier than conventional 401(k) plans. Benefit formulas simplify the administration process. Plus, employers choosing this plan over a conventional 401(k) don't have to prove that their plans follow non-discrimination rules.
Employees benefit from SIMPLE 401(k) plans, too. As with conventional 401(k) plans, participants can access funds in their retirement savings through a loan or hardship withdrawal (which may include a 10% penalty). And, unlike conventional 401(k) plans, these plans allow employees to be fully vested through every contribution.
What are the drawbacks?There are some drawbacks of this plan over other options. For employers, these include the same administrative burdens conventional 401(k) programs face in providing loan and withdrawal flexibility.
Small business owners choosing this plan cannot provide any other retirement plans.
What are the contribution limits?In 2020, employees under age 50 could contribute $13,500, and employees 50 or older could contribute up to $16,500. Employers could match their employees’ contributions dollar for dollar (up to 3% of their pay) or provide a 2% non-elective contribution for every eligible employee.
Will I need to complete any other filings?You will need to file Form 5500 each year. |
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Defined benefit plans provide employees with a preset payout at the time of their retirement. Regular employer contributions, which are calculated by actuarial formulas, help them build up the savings they need to reach that target amount.
Does my business qualify?Businesses of any size can qualify as long as they don’t have a retirement program in place that keeps them from adopting other plans.
What makes this plan a great choice?The main perk for employers is that they can contribute and deduct a larger amount each year than they could through a defined contribution plan such as a 401(k), profit-sharing plan, or money contribution plan.
Employees benefit greatly from these plans. The plans afford them a realistic picture of the funds they can access when they retire. Plus, their benefit payout doesn't depend on business or investment performance. And in many cases, participant loans are possible, giving employees early (but temporary) access to their funds.
What are the drawbacks?There are drawbacks to this plan for employers. First, this plan can be costly and complex to provide. This is partly because of the individualized calculations employers must complete to ensure the correct benefit payout. Second, employers who under or over contribute to the plan may face an excise tax. And, third, employers cannot retroactively decrease the benefit, even in times of hardship.
There are two drawbacks to this plan for employees, too. First, plan funds could take years to vest fully. And second, fund withdrawals are typically not possible until the participant reaches age 59 ½.
What are the contribution limits?The IRS states that there are limits to the benefits that an employer can provide. They also advise consulting with an enrolled actuary for details.
Will I need to complete any other filings?Employers must file Form 5500 each year. An enrolled actuary must sign Schedule B of the form. |
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Through a profit-sharing plan, employers can make discretionary contributions toward their employees’ retirement savings. Businesses don't need to contribute a certain amount—or any amount at all—and they don’t need to be “profitable” to make this form of contribution.
But here is something to keep in mind. Those who choose to contribute must use a formula to set up a fair allocation. A formula could be one that assigns each employee a percent of the funds allocated to the plan. Here, a person's portion would need to match the percentage of wages or salaries they obtain from the firm’s total wages and salary.
Does my business qualify?Any business can qualify as long as it doesn’t have a retirement program in place that prevents them from setting up other plans.
What makes this plan a great choice?Many employers who choose this plan do so because it's flexible. Since employer contributions aren’t required, employers can preserve their cash on hand to cover shortages and downturns.
Employees benefit from this plan most when their business prospers. Their shares of profits may help them receive more retirement-directed compensation than they might through other retirement plans. Plus, employees can take loans against their profit-sharing plans, and they can withdraw the funds before retirement (though they’ll pay a 10% penalty for the withdrawal if they are under the age of 59 ½).
What are the drawbacks?Small business owners can pay higher administrative costs than they might for other retirement plans. Plus, they must test that the benefits they offer don’t favor highly paid employees over those in lower pay grades.
The drawback for employees is that they can't contribute to the profit-sharing plan. Employees who wish to add to their own retirement savings must set up a separate account.
What are the contribution limits?Employers may contribute up to 25% of an employee’s pay, but they cannot exceed $58,000 per employee, according to IRS guidelines for 2021.
Will I need to complete any other filings?Employers must file Form 5500 each year and submit participant disclosures. |
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Employers choosing a money purchase plan must make fixed contributions each year toward their employees’ retirement savings. Plan documents spell out the contribution that’s required as a percentage of an employee’s pay. That percentage must be paid to every eligible employee, regardless of the business's profitability.
Does my business qualify?Businesses of any size can set up a money purchase plan as long as they don’t offer retirement programs that keep them from establishing other plans.
What makes this plan a great choice?This plan is simple to administer, and it makes budgeting retirement obligations easy.
Employees often like these plans, too. One reason is that they can amass more savings than they might through other retirement plans. Another is that they can take out loans against the balance. And finally, employees can make their own contributions to the plan, which isn't possible with some other plans.
What are the drawbacks?There are several drawbacks to keep in mind. First, the administrative costs of these plans can be high. Second, employers must test that the benefits don't favor highly paid employees over those in lower pay grades. Third, employers may need to pay an excise tax if they don’t fulfill the contribution that’s laid out in their plan.
For employees, the most notable drawback is that they can't withdraw the funds while they're enrolled in the plan.
What are the contribution limits?Employers may contribute up to 25% of an employee’s pay, but they cannot exceed $58,000 per employee, according to IRS guidelines for 2021.
Will I need to complete any other filings?Employers must file Form 5500 each year. |
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Through a SEP plan, employers can contribute to an individual retirement account or individual retirement annuity created for each eligible employee.
Does my business qualify?Any size business can qualify by adopting Form 5305-SEP, a SEP prototype, or a lawyer-drafted plan document. Those who choose to qualify through Form 5305-SEP can't offer other retirement plan programs to their employees.
What makes this plan a great choice?SEP plans are often a great choice for employers. They’re easy to establish and administer. They don’t have the high startup or administrative costs that many other retirement plans require. Plus, these plans allow for flexible contributions. Here, employers can make large contributions (up to 25% of each employee’s pay) when cash flows are strong and reduce the amount when needed.
Employees benefit from SEP plans, too. Through these plans, each employee receives an equal contribution (in terms of percent of pay rather than dollar amount), and they are immediately fully vested in the balance. Employees can also withdraw their funds before reaching retirement age, though the funds they withdraw will count as taxable income and may be subject to an additional 10% penalty if the participant is under age 59 ½.
What are the drawbacks?There are some drawbacks to these plans. A small business owner can't offer SEP plans with any other non-SEP retirement plans (if the plan is established through Form 5305-SEP). And, employers must be equitable in their payouts to employees (in terms of the rate paid rather than the dollar amount), so SEPs cannot be used to incentivize certain employees and not others.
One drawback for employees is that they can't contribute to their own SEP plan. If they want to contribute to their own retirement savings, they must establish their own retirement savings account. And, unlike with some other retirement savings programs, participants cannot borrow against their SEP plan or use those assets as collateral.
What are the contribution limits?Employers may contribute up to 25% of each employee’s pay, but the total contribution cannot exceed $58,000 per year per employee (according to IRS limits set for 2021).
Will I need to complete any other filings?Employers usually have no filing requirements. |
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Employers can set up an agreement that allows eligible employees to contribute part of their salary to a SIMPLE IRA plan rather than receiving it as part of their regular pay. Both employers and employees can contribute to this plan.
Does my business qualify?Businesses with 100 or fewer employees may form these plans through Form 5304-SIMPLE, Form 5305-SIMPLE, a SIMPLE IRA prototype, or a lawyer-drafted plan document. However, small business owners may not offer any other retirement plans if they choose to offer a SIMPLE IRA.
What makes this plan a great choice?Like a SEP plan, SIMPLE IRAs are easy to establish and administer. There are few startup and administrative costs compared to many other retirement plans. Plus, there are no discrimination testing requirements.
Employees are immediately fully vested in the full balance of their SIMPLE IRA, and unlike with a SEP plan, they can contribute to their own accounts. Employees may make withdrawals from their accounts, but the funds they withdraw count as taxable income and may be subject to a penalty (10% for employees under the age of 59 ½ or 25% for employees under the age of 59 ½ if withdrawing within the first two years of participation).
What are the drawbacks?Small business owners offering SIMPLE IRAs to their employees may not offer any other retirement plans, and they must abide by strict rules regarding contributions. Specifically, they must contribute each year in one of the following ways:
Employees may see these rules as a disadvantage because the maximum contribution is lower than in some other plans.
These plans don't allow participant loans.
What are the contribution limits?Employers may match up to 3% of an employee’s pay or provide an unmatched contribution that equals 2% of an employee’s pay. The latter option is capped at $290,000 for 2021.
Employees may also contribute to their SIMPLE IRA plans through a salary reduction agreement and contribute directly to the SIMPLE IRA.
Will I need to complete any other filings?Employers usually have no filing requirements. |
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Employers don't administer payroll deduction IRAs. Instead, employers allow their employees to contribute to outside IRA plans through payroll deductions.
Does my business qualify?Almost every business can provide this option.
What makes this plan a great choice?From a small business owner’s standpoint, these retirement plans are the easiest to establish and administer. Employers have no role in creating the accounts and simply transmit the portion of pay an employee elects directly to their traditional or Roth IRA.
The benefit for employees is that they have greater control over how much income they'll invest in their retirement. They also have full say in the financial institution and investment options they’ll use to build their retirement accounts. Plus, employees can withdraw their funds before reaching retirement age if necessary, though the funds they withdraw may be subject to income tax and a 10% tax penalty if the participant is under the age of 59 ½.
What are the drawbacks?Employers cannot contribute to these plans, and they can’t claim a deduction for doing so. Further, these plans rarely help employers build goodwill among employees because they aren’t supporting their employees’ retirement in any meaningful way.
Employees cannot take out a loan against these funds, and they cannot use the assets as collateral.
What are the contribution limits?Employers cannot contribute to these plans.
Employees may contribute up to the current IRA limits. As of 2021, these limits are $6,000 for people under age 50 and $7,000 for people age 50 or older.
Will I need to complete any other filings?Employers have no filing requirements. |
How can my small business move forward with one of these retirement plans?
Once you have an idea of the kinds of plans that could work for your business, you'll decide whether to run your plan in-house or outsource it.
Lots of small business owners find running these retirement plans in-house to be a headache. It can be time-intensive and complicated to keep up with the latest regulations. Because of this, outsourcing is often the best choice. Here, you'll find a few firms that can set up and help you run your program:
You may also want to work with an attorney to file your plan documents and firm up its terms and conditions. Would you like to connect with an attorney who can help you with these steps? Start here:
What's next?
To learn more about the benefits you might offer your employees, check out this article:
Then, log into your owner’s portal for articles that can help you lead your team, navigate your financial concerns, and prepare your business for growth.
