Offering a retirement plan can help you attract and retain top employees. Several plans exist, including traditional pay deduction IRAs and SIMPLE 401(k) plans. Choose the right plan for your business entity and the number of employees (if any). Consider the tax benefits at contribution and distribution time as well.
Investment Options
There are many different investment options available through retirement plans for small business. Your chosen one depends on your company’s needs and the paperwork and administrative responsibilities you’re willing to take on. For example, consider a Simplified Employee Pension plan if you don’t want to handle a lot of paperwork but still want to save aggressively.
This plan allows you to make contributions up to a set annual limit. It’s easy to run and usually costs less than a 401(k) or other plans. You also might opt for a SIMPLE IRA or a traditional 401(k), depending on how much you want to contribute each year and whether or not you’ll be hiring employees.
Both offer the option to match employee contributions with minimum contribution requirements for your business. If you have highly compensated employees and prefer a vesting schedule to encourage retention, consider a safe harbor 401(k) or a traditional 401(k). Both avoid non-discrimination testing so highly compensated employees can aggressively save without fear of losing tax advantages.
Tax Benefits
Often, small business owners’ most significant reasons for not offering retirement plans involve cost or time. However, the IRS offers several tax credits that make a small business plan far more affordable and accessible to manage than you might think.
These include the Startup Plan Credit, which deducts up to 50 percent of the costs of setting up and maintaining a retirement plan for the first three years. There is also the Simplified Employee Pension (SEP) IRA, which allows employees to contribute a maximum of $16,500 in 2022, and the Individual 401(k), which has the same contribution limits as a standard 401(k).
Additionally, many providers now offer automated administrative services, which can help you save time by automating paperwork and simplifying the investment process. Choose a plan with payroll integration, which can simplify the process further.
This can reduce the manual paperwork you must complete and allow more accurate contributions at contribution and distribution time. Depending on your plan type, you can take advantage of additional benefits, including employer-matching contributions and profit-sharing options.
Tax Deductions
Offering a retirement plan helps small businesses take advantage of significant tax deductions. Tax deductions reduce taxable income, helping small businesses save money and increase the amount they can contribute to their employees’ accounts. Moreover, the federal government has passed laws, such as the 2019 SECURE Act and 2022’s Enhanced Tax Credit, designed to make it even more financially beneficial for businesses of all sizes to offer employees a retirement savings program.
The SECURE Act, for example, offers a new tax credit that can total up to $16,500 over three years for business owners that add automatic enrollment to their retirement plans. To qualify, a business must have at least one non-highly compensated employee (NHCE) and not have had a retirement plan in place for the preceding three years that covers substantially all of its employees.
The business must also be a qualified small business employer and meet other requirements outlined in the law. This includes paying reasonable startup costs and administering the plan. A simple way to set up a retirement plan for small businesses is through a Simplified Employee Pension (SEP) IRA, which allows employers to decide which years they want to contribute to employees’ accounts based on a formula adopted in the SEP IRA’s plan document.
Flexibility
Retirement plans for small businesses offer a wide range of investment options, including Traditional, Roth, and Safe Harbor 401(k) plans. Most plans feature higher contribution limits than a SEP IRA, an employer match, and profit-sharing contributions. Some offer flexible features such as a vesting schedule, which helps with employee retention.
In addition to giving employees a tax advantage, retirement savings plans can help attract and retain talent. By offering a plan, you can stand out among competitors, making it more likely that new hires will accept your job offer and current employees won’t look for other employment opportunities. You can also use your retirement plan to prepare for selling your business.
This is important because market conditions and other factors can affect your business’s worth in a sale. By building a nest egg into your company through retirement savings, you can make selling your business at a premium easier. For this reason, developing an exit strategy is essential before you need it.
Attract and Retain Employees
The tax benefits of retirement plans for small businesses can attract and retain employees. Employees can often save more for retirement with an employer-sponsored plan than an individual account, and their contribution money is excluded from their income tax.
These benefits can make recruiting and retaining talent for your business more accessible, which may save you on hiring costs and lost productivity. In addition, retirement plans can also incentivize employees to stay with a company longer, which may reduce costly turnover rates and improve worker morale.
Conclusion
The right retirement plan can also increase employee loyalty and your odds of finding the ideal buyer for your small business when you decide to sell. A Simplified Employee Pension, or SEP IRA, is an easy-to-set-up, low-maintenance retirement plan that allows employees to save up to $14,000 annually (with catch-up contributions of $3,000 for those age 50 or older). It requires fewer yearly filings than other plans and offers higher contribution limits than an IRA.
