Thinking about trying to choose a retirement plan for your small business can be an overwhelming task. Researching your options, knowing your employees, and wanting to invest in your future are keys places to start to relieve some of your stress and to finally decide on offering a plan or not.
Why start a retirement plan?
Private businesses are not required to offer a retirement plan to their employees but there are a few reasons that having a retirement plan is a good idea for your business. Starting a retirement plan is both beneficial for you as the business owner and for your employees. First, offering any type of retirement plan is a key factor in attracting and retaining strong employees for your organization. Secondly, retirement plans offer an exceptional tax benefit for your business. Finally, starting a plan for your business is great way to help you save for your own retirement!
**Update. As of April 2023, Maine businesses with 25 or more employees will be required to offer an employer-sponsored retirement plan to their employees, or offer them the option to contribute to a state-sponsored retirement plan. Starting in April of 2024, businesses with 5 or more employees will need to comply with this requirement. You can learn more about Maine’s Retirement Savings Program here.**
What are the tax benefits of a retirement plan?
Offering any type of retirement plan to your employees can offer you, as the business owner, certain tax savings. The government offers a Retirement Plans Startup Costs Tax Credit which allows an employer to deduct up to 50% or $500 of plan setup fees and administrative costs for the first three years of the plan. Any employer contributions made to the retirement plan are deductible from employers’ own income. Employee contributions made to the plan are not taxed until they are distributed to the employee. Finally, all money that is invested in a retirement plan grows tax free!
The two main types of plans for small businesses.
There are many types of common retirement plans out there. However, two types of retirement plans that a small business will generally offer are a SIMPLE (Savings Incentive Match Plan for Employees) IRA and a Traditional 401(k). While these two plans are different in how they operate, they both are great investment vehicles for your business.
SIMPLE IRA VS 401(k)
Choosing which retirement plan can be a big decision for your small business but it doesn’t have to be a stressful one. The following table compares the two plans:
|Employer Eligibility||Small business with less than 100 employees.
|Any business of any size.|
|Employee Contribution Limits||Capped at $15,500 if under 50 and $19,000 if over 50.
|Capped at $22,500 if under 50 and $30,000 if over 50.|
|Employer Contribution Rules||Contributions are mandatory.
Either 2% fixed contribution even if employee doesn’t contribute or up to 3% match of employee contribution.
|Contributions not required.
Required proportional contributions for each eligible employee if you contribute for yourself.
|Employer contributions deductible on business tax return.
|Employer contributions deductible up to certain IRS limits.|
|Setup and Maintenance||Very low administrative and setup costs with very little paperwork.
|Higher setup, administrative and plan fees with lots of paperwork.|
|Rules||Employees can withdraw from plan at anytime with 10% penalty if under 59 ½ years old.
Any investments available through the financial institution that holds accounts.
Easily transferred during job change.
|Employees are allowed to take a loan against their account.
Investment selection curated by employer and plan administrator.
So, which plan should I choose?
The final decision on which type of plan you want to offer your employees is up to you. Do you want an easy plan that has lower setup and administrative costs for your business? Then a SIMPLE IRA maybe best for your company. Do you have older employees, and you want them to be able to contribute more money as they move closer to retirement? In this case, a 401(k) might be the right choice. Either way, offering a retirement plan is a strong strategy for your business to attract and retain strong employees, can help you save for your own retirement, and can offer great tax savings to your business.
What are the next steps?
Next you will want to explore your options, decide on a plan, and implement this plan to your employees.
When choosing a retirement plan, it’s important to understand the costs associated with setting one up, arranging for employee contributions, and handling ongoing administration. Take time to research your options and whether it be your payroll company, mutual fund companies or brokerage firms, focus on trustworthy, reputable companies to help your company with retirement plans.
Once you have chosen a provider, evaluate your options and decide on which type of plan makes the most sense for your business.
Once a plan is chosen, the next step is a let your employees know. Provide packets outlining the key features and advantages of the plan to interested employees. Get them signed up and have them start saving for their future!