Setting your team up for success in retirement

Offering a retirement plan to employees benefits both you and them.

For small businesses, offering an attractive retirement plan to employees can give you a competitive edge in the employment landscape. In fact, according to a US Bureau of Labor Statistics report, only 57% of private-sector firms with fewer than 100 employees offered a retirement plan in 2023.

In addition to attracting and retaining employees, offering a retirement plan may provide your business with tax advantages. There are a few plans you can consider, so consult with your advisor to see which plan accomplishes your goals – for both your business and its employees.

Retirement plan options

Each retirement plan benefits your business and employees differently. Consider these options to determine which is the best fit.

IRAs

A Simplified Employee Pension (SEP) IRA and Savings Incentive Match Plan for Employees (SIMPLE) IRA are among the lowest-cost options for retirement plans. The advantages of these IRAs are that they’re easy to set up and plan administration is relatively simple.

There is one major difference between these two employer-sponsored IRAs: A SEP IRA is funded solely by employer contributions, while a SIMPLE IRA is funded through both employer and employee pretax contributions. SIMPLE IRAs give employees the opportunity to contribute a portion of their salary to their own retirement account in addition to the employer’s contribution.

Businesses may benefit from tax credits to offset the cost of starting these plans, and can deduct employer contributions to SIMPLE IRAs on federal tax returns. (However, if you have more than 100 employees, your business is not eligible to the SIMPLE IRA option.)

401(k)

While 401(k)s are available to small businesses, they have administrative requirements other plans may not share.

A 401(k) offers employers additional flexibility in plan design and higher contribution limits for employees. It allows employees to defer a portion of their wages to the plan on a pretax basis, and allows the employer to offer a match or profit-sharing contribution as well. A 401(k) plan can also have a Roth 401(k) plan option, allowing for after-tax contributions.

You can offer these plans no matter how many employees you have, and they’re even an option for a sole proprietorship. Employers may be able to claim a tax credit for offering 401(k) plans and deduct employer contributions on federal income tax returns.

Defined benefit plan

A defined benefit plan is unlike the other plans in that it offers a specific benefit at retirement. Annual employer contributions to the plan are mandatory, regardless of a business’s profitability, so businesses with an uneven or unpredictable cash flow should use caution when selecting a defined benefit plan.

These plans are designed to provide income at retirement that is based on a predetermined formula. In some cases, the employee may have the option to choose either a stream of income or a lump-sum payment at retirement. The employer is responsible for ensuring the plan is funded to provide the benefit defined by the terms of the plan as calculated by the plan actuary. While this type of plan typically requires a substantial financial commitment, it can offer a relatively large annual tax-deductible contribution for the employer.

Discuss the benefits and drawbacks of these plans with your advisor, who can help you determine which route is best for your business and employees.

401(k) plans are long-term retirement savings vehicles. Withdrawal of pre-tax contributions and/or earnings will be subject to ordinary income tax and, if taken prior to age 59 1/2, may be subject to a 10% federal tax penalty. Investing involves risk and you may incur a profit or loss regardless of strategy selected, including diversification and asset allocation.