Selecting the right retirement plan for your small business is a crucial decision that can impact your ability to attract and retain talent. It’s essential to carefully evaluate your business's needs and goals to choose the most suitable retirement plan. Numerous options are available, each with its own rules, benefits, and limitations. Knowing the pros and cons of each one can help you make an informed decision.
Why Offer A Retirement Plan?
The Center for Retirement Research found that only 46% of small businesses offered a retirement plan. A 2023 Capital Group survey reported that 40% of small business owners didn’t believe their company was large enough for a retirement plan option. The same study found that 32% of small business owners feel they lack the knowledge to offer retirement plans while keeping their businesses afloat.
However, despite these hesitations, there are several compelling reasons why offering a retirement plan will benefit your small business:
- Attract and retain talent: A competitive retirement plan can help you stand out to potential employees and retain current ones. Many job seekers consider retirement benefits a key factor when evaluating job offers.
- Tax advantages: Retirement plans can provide significant tax advantages for both employers and employees. Employer contributions are typically tax-deductible, and employees can defer taxes on their retirement savings until withdrawal. Additionally, the SECURE Act of 2022 offers a tax credit to small businesses that offer retirement plans and a bonus credit if that plan offers automatic enrollment.
- Employee financial security: Helping employees save for retirement can increase their economic security and overall job satisfaction, leading to a more motivated and productive workforce.
- Owner benefits: As a business owner, you can also personally benefit from a retirement plan by saving for your retirement in a tax-advantaged manner.
Types Of Retirement Plans For Small Businesses
Choosing the right plan for you and your team can be a complex process; the most common options include:
Simplified Employee Pension (SEP) Individual Retirement Account (IRA)
SEP IRAs are designed for self-employed individuals and small business owners. They are easy to set up and maintain, with low administrative costs. Only the employer contributes to the plan, and contribution limits are high. Employers can contribute up to 25% of each employees’ compensation, up to a maximum of $69,000 for 2024. Contributions are tax-deductible for the employer, and employees are immediately 100% vested in their SEP IRAs.
Pros:
- Simple to administer.
- Flexible annual contributions, allowing adjustments based on your business profitability.
- High contribution limits.
Cons:
- Only the employer can contribute.
- Contribution amounts must be the same percentage for all eligible employees.
Savings Incentive Match Plan For Employees (SIMPLE) IRA
SIMPLE IRAs are ideal for businesses with 100 or fewer employees. They are relatively easy to set up and administer. Both employers and employees can contribute to the plan. Employees can contribute up to $16,000 annually for 2024, with an additional $3,500 catch-up contribution for those aged 50 and over.
Employers must match employee contributions dollar-for-dollar up to 3% of compensation or make a 2% non-elective contribution for all eligible employees. Employer contributions are tax-deductible.
Pros:
- Easy to set up and manage.
- Encourages employee participation through matching contributions.
- Lower administrative costs compared to 401(k) plans.
Cons:
- Lower contribution limits compared to SEP IRAs and 401(k) plans.
- Employer contributions are mandatory, which can financially burden some businesses.
401(k) Plan
401(k) plans are one of the most popular retirement plans for businesses of all sizes. These plans can include features such as Roth contributions, loan provisions, and automatic enrollment. They offer flexibility and higher contribution limits.
Both employers and employees can contribute to the plan. Employees can contribute up to $23,000 annually for 2024, with an additional $7,500 catch-up contribution for those aged 50 and over. Employers can choose to match employee contributions or make non-elective contributions. All employer contributions are tax-deductible. Employers can also set up profit-sharing contributions.
Pros:
- High contribution limits.
- Flexibility in plan design and employer contributions.
- Encourages significant employee participation and savings.
- Attractive to potential employees.
Cons:
- Higher administrative and compliance costs.
- It is more complex to set up and maintain than SEP and SIMPLE IRAs.
Defined Benefit Plan
Defined benefit plans, or pension plans, promise a specific retirement benefit amount based on a formula considering factors such as salary history and years of service. In this plan, the employer contributes enough to fund the promised benefit. According to the IRS, this amount is “100% of the participant's average compensation for his or her highest three consecutive calendar years or $275,000 for 2024.” This plan’s higher contribution limits allow for potentially substantial retirement savings.
Pros:
- Provides a guaranteed retirement benefit.
- High contribution limits.
- Attractive to employees seeking retirement security.
Cons:
- Complex and costly to administer.
- Employer bears investment risk and funding responsibility.
- Less flexibility in adjusting contribution amounts.
Factors To Consider When Choosing A Retirement Plan
- Business size and structure: The number of employees and your business structure (e.g., sole proprietorship, partnership, corporation) can influence the suitability of different plans. However, don’t let size be your reason for avoiding a plan altogether. The Employee Benefit Research Institute found that a business that is too small or not established enough was the most cited reason for not offering a plan. In many cases, this isn’t true.
- Employee needs and preferences: Understanding your employees' retirement goals and preferences can help you choose a plan that meets their needs and encourages participation.
- Budget and administrative capacity: Consider the costs of setting up and maintaining the plan, including administrative fees and required employer contributions.
- Tax benefits: Assess the tax advantages of different plans for the business and employees.
- Flexibility and customization: Some plans offer more flexibility regarding contributions, investment options, and plan features. Determine how much flexibility you need to meet your business and employee needs.
By understanding the different types of retirement plans available and their respective benefits and limitations, you can select a plan that not only helps you attract and retain top talent but also provides valuable financial security for you and your employees.
The good news is you don’t have to do it alone.
A professional employer organization (PEO), like GMS, can transform your small business's retirement plan offerings. With a proven track record of helping over 3,500 companies with p and 401(k) plans, GMS delivers cost-effective solutions that rival larger firms.
Ready to elevate your retirement benefits? Click here to learn more about how GMS can help you set up a retirement plan best suited for your small business.