What Small Business Owners Should Know About Retirement Plans

What Small Business Owners Should Know About Retirement Plans

Two people walking with bikes on beach discussing their small business retirement plan

Did you know more than 40 percent of permanent employees lack access to an employer-sponsored retirement plan? Sadly, this has led to many retirees experiencing a tremendous decline in their living standards in their retirement. As such, not only is it vital to plan for your own retirement as an entrepreneur but also to help your employees to plan for their future.

There are lots of compelling reasons why you should start a retirement benefit plan for your employees including an increased chance of retaining and attracting qualified employees. Also, some retirement plans offer tax advantages for your business as well as for the employees.

In this article, we’re going to look at relevant information you need to know about starting a retirement benefit plan as a small business owner:

Types Of Retirement Plans For Small Businesses

There are many retirement plans for businesses of all sizes. However, the most popular options for small business owners include:

  • 401(k): designed ideal for any business size, 401(k) plan’s coverage includes both you and your employees. This plan automatically enrolls all your employees, and contributions are subtracted from their income.
  • SEP IRA: You can set up Simplified Employee Pension IRAs to offer retirement benefits for yourself and your employees. With a SEP-IRA plan, you must contribute the same percentage of pay for all your employees. The plan is typically easy to set up and maintain.
  • SIMPLE 401(k): This is arguably one of the best plans if your small business has less than 100 employees and doesn’t have another retirement plan. The SIMPLE 401(k) plan is funded by deferred compensation contributions of your employees and your contributions.
  • SIMPLE IRA: Unlike a 401(k), the SIMPLE IRA plan is less complicated and cheaper to set up, providing you with a simplified way to contribute toward your employees’ retirement savings.

The good thing is that most of the small business retirement plans permit you to subtract contributions as a business expense. Another major advantage is that many offer tax credits and contributions aren’t taxed immediately. However, every retirement plan has its own rules, meaning not all will be best for your business. As such, you should perform due diligence on the various plans before making a decision.

Factors to Consider When Choosing a Retirement Plan for Your Small Business

Figuring out what’s the best retirement plan to choose for your employees can often feel overwhelming. However, you should consider several key factors as you choose the type of retirement plan to offer to ensure you make the right decision. Some of the key factors to consider include:

1. Expenses associated with the plan

Undoubtedly, most important thing you need to know is the fees associated with the plan’s offerings. You also need to know whether the plan employs a flat-fee or asset-based model to calculate the costs. Try to inquire if the plan includes an ERISA bond to protect against fraud by a fiduciary advisor. This will help to ensure the plan you choose has reasonable fees for its services.

2. Available Investment Options 

You need to know the kind of investments available in your plan, and their associated costs. Your plan should have an array of investment options in a variety of industries.

Some of the investment options you may consider include a mix of various mutual funds, index funds, treasury bills, and corporate bonds. A plan with a variety of investment options not only produces steady returns but also protects your savings market shocks.

3. Who can Contribute

First off, you need to know who can contribute to the plan, whether it’s you, your employee, or both of you. If you want to be the only one contributing, your best option is a profit sharing plan or SEP IRA, which allows you to decide the amount you’ll be contributing every year.

If you want a plan that only your employees contribute, consider a SEP IRA or a payroll deduction IRA. On the other hand, consider a 401(k) or a SIMPLE IRA plan, so you can contribute together with your employees.

4. Contribution Limits

Next, it’s important to consider the maximum and minimum contribution limits that you and/or your employees can make. For example, you may consider choosing a SEP IRA or a 401(k) with contribution limits of up to $57,000, which will allow your employees to save huge amounts.

5. Flexibility of the Plan design

The plan you choose should be flexible enough to fit your business’ unique needs. Consider the ownership structures of your small business, the goal you want to achieve by starting a retirement plan, and the types and number of employees you have.

Retirement Plans Requirements

There is no legal requirement that forces you to offer your employees any form of retirement plan as a small business owner. However, if you voluntarily choose to offer a retirement plan to your employees, you must comply with the requirements, comprising distribution, vesting, and annual reporting requirements.

Often times, complications quickly arise once businesses begin offering retirement benefits to their employees. This is mainly because retirement plans fall under government scrutiny, and you’re likely to make mistakes while setting up a plan.

Contact us today, if you need legal help with corporate maintenance and planning. We can introduce you to accountants and third-party payroll companies who can help you set up a plan.

Adam Blaier, Esq.


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