One of the core challenges of starting, growing and managing a small business is that the bulk of the major responsibility falls on your plate. If you own your own business, chances are there is no HR department focused on your individual retirement or financial needs. Likewise, your employees don’t have access to the same retirement planning resources that a larger company may provide.
Fortunately, in this day and age it’s possible to bring many “big company” offerings to your small business, without too much overhead and hassle. Making the effort to evaluate and put in place an employer-sponsored retirement plan is a wise investment of your limited time. Advantages could include:
It’s important to remember that there is no “one-size-fits-all” option when it comes to choosing a retirement plan for your business. It will be well worth your time to look closely at your options and evaluate the advantages and disadvantages of each plan before making a decision. The Choosing a Retirement Solution for your Small Business guide from the U.S. Department of Labor may be a helpful resource when comparing the different plans available to you. Let’s take a closer look at some of your options:
- Potential tax benefits for you and your business
- A strong competitive advantage for your company
- Improved retention of your valued employees
- Financial security for you and those who work for you
Sharing the Wealth: Profit-Sharing Plans
One option for businesses to consider is a profit-sharing retirement plan. This type of plan provides you with the flexibility to decide when and what to contribute to the plan, so long as you follow a consistent procedure.
The first step in a profit sharing plan is to establish a separate account for those who participate. Then, based on the criteria and formula you establish, the company’s contribution is allocated to each of those accounts. In turn, those funds are collectively invested under certain rules of prudence and diligence. Returns or losses on those investments are then also appropriately allocated to the individual accounts.
There are numerous rules and regulations that govern profit-sharing retirement plans, and they are often changed by the government. In simple terms, the rules govern how much can be contributed each year to each account, and how much of the contributions are tax-advantaged.
The Powerhouse Option: 401(k) Plans
One of the most popular small business retirement plans is the 401(k) plan. In this type of plan, the employee defers part of their compensation to the plan, and that deferral is deposited into the employee’s retirement account. Employers may make contributions as well. The details governing those contributions vary based on the exact type of 401(k) plan being offered. Types of 401(k) plans for small businesses include:
More details on each of these 401(k) plans can be found on the IRS’ 401k Plan Overview page. Choosing the right plan for your business will depend on various criteria such as the number of employees you have and your company’s profitability.
- Traditional 401(k)
- A traditional 401(k) allows eligible employees to make pre-tax plan contributions through payroll deductions. Employers have the option of making contributions on behalf of all plan participants, making matching contributions based on the elective deferrals that employees make, or both. In this type of plan, the employer is subject to annual tests to verify that the employer contributions meet specific nondiscrimination requirements.
- Safe Harbor 401(k)
- This type of plan is similar to a traditional 401(k), but it requires the employer contributions to be fully vested when they’re made. A safe harbor 401(k) plan is also not subject to the nondiscrimination tests that apply to traditional 401(k) plans.
- SIMPLE 401(k)
- This type of plan was created as a cost-efficient way for small businesses to offer retirement benefits to their employees. Like a safe harbor plan, a SIMPLE plan requires that employer contributions be fully vested, and also like a safe harbor plan, a SIMPLE 401(k) is not subject to annual nondiscrimination tests.
Other Plan Options
While the above are typically considered the most popular approaches to small business retirement plans, your options don’t stop there. Also worth considering are:
The Bottom Line
- Money Purchase Pension Plans
- This type of plan is very similar to a profit-sharing plan, but unlike a profit-sharing plan, which gives employers the flexibility to adjust yearly contributions based on the company’s profitability, a money purchase pension plan requires employers to make annual contributions of a fixed percentage, regardless of profitability.
- SIMPLE IRA Retirement Plans
- SIMPLE IRA plans are for businesses that have no more than 100 employees and that also do not currently offer another retirement plan. These plans were designed to be “simpler” to execute, offering lower start-up and annual costs compared to other types of plans. More information on SIMPLE IRA plans can be found in the U.S. Department of Labor’s guide to SIMPLE IRA Plans for Small Businesses.
- SEP Plans
- SEP, or “Simplified Employee Pension” plans allow employers to contribute directly to their employees’ Individual Retirement Accounts (IRAs). These plans do not have the start-up or operating costs that most conventional retirement plans have. More information about SEP plans can be found in the U.S. Department of Labor’s guide to SEP Retirement Plans for Small Businesses.
The truth is that you have a wide range of options available to you when it comes to choosing a retirement plan for your small business. In addition to doing your own due diligence to select the right retirement plan, remember that it’s always wise to also speak with a tax advisor or financial planner before making any major financial decisions regarding your business. The right plan will not only allow you to plan for your own retirement, but will allow your business to incentivize, recruit and retain employees by providing them with a valuable benefit. The return on investment you’ll receive by choosing the right retirement plan could be very significant in real dollars, as well as your company’s morale and stability.