It seems like every day, another report comes out about how difficult it is to hire employees and retain top talent, and you’ve likely seen it within your own organization. As a small business owner, you understand that your employees are the life-blood of your business and without them, you won’t be able to run or grow your operations. How then, do you attract the right people to your business and then ensure that you keep them happy enough that they don’t jump ship at the next shiny object out there?
The good news is that offering the right benefits for your employees is just good business. The great news is that you don’t have to run a gigantic corporation to give your talented team members the future they deserve.
There are a number of small business retirement plans available and throughout this piece, we’ll be discussing the different options, which ones are right for your business, how much to contribute, and how to use these plans as a tax advantage. If you’re ready to improve your business and the lives of your employees, read on.
Need help with managing your business finances?
Contact Larry L. Bertsch, CPA & Associates, LLP today!
Types of Retirement Plans Available To Small Businesses
As a small business owner, you need to be concerned about your own future. After all, you don’t work for someone else’s company. No one is squirreling away money for your golden years. No, you are responsible for making sure that you can retire with dignity, and, if you care about your employees and your business, you’ll want to provide the same security for your employees.
Let’s take a look at the different retirement plans for small businesses available today.
Traditional 401(k)
A Traditional 401(k) is one of the best-known types of retirement plans. This type of plan does not require employee participation; however, it allows them to make pre-tax contributions through their salary, or after-tax Roth contributions. Employer contributions are not mandatory; however, you can utilize a vesting schedule to encourage employee retainment (the company can recoup a percentage of contributions if the employee leaves before a set time).
This type of plan is easy to set up and fees will vary by provider. The maximum contribution for employees is $20,500 per year with an additional $6,500 in catch-up contributions for employees 50+ years. Employers can contribute up to 25% of their employees’ compensation not to exceed $61k (under 50) or $67.5k (over 50) combined between employee and employer. This type of retirement plan undergoes nondiscrimination testing to ensure that high-earning employees are not favored over lower-compensated employees.
Safe Harbor 401(k)
A Safe Harbor 401(k) is similar to a Traditional 401(k) in structure, however, there are two major differences. First, this type of retirement plan does not have to pass an annual IRS nondiscrimination test. This means that the business owner and the higher-compensated employees can invest more aggressively in their plans. Second, employers must match or contribute to employee retirement accounts and these funds are immediately 100% vested.
Solo 401(k)
A Solo 401(k) is designed for businesses where the only “employees” are the owner and his or her spouse (if the spouse works for the organization as well). When you utilize one of these small business retirement plans, you will likely need to set up eligibility requirements (ex: how many years of service). In addition, if and when you hire non-owner employees who meet these eligibility requirements, you may no longer be able to utilize this type of retirement plan and will have to select a new one. This makes it less desirable for businesses looking to grow.
The contribution limit is $21,500 for employees and allows for a $6,500 catch-up contribution for employees 50+. Employees may contribute up to 25% of compensation, not to exceed $61,000 ($67,500 for 50+) between employee and employer.
Simple IRA
A Simple IRA is relatively easy to manage and requires no discrimination testing. This type of small business retirement plan is ideal for businesses with less than 100 employees. Employers are required to contribute to it and a participant becomes fully vested immediately. This means employers can not recoup their contributions if the employee chooses to leave.
The contribution limits for a Simple IRA are as follows: $14,000 for employees and $17,000 for employees age 50+. Employers may not exceed a 2% contribution or a 3% match.
SEP IRA
A Simplified Employee Pension (SEP IRA) is a retirement savings plan and a potential vehicle for your small business retirement plans. It is relatively inexpensive for employers to establish and doesn’t require annual employer contributions. This means employers can contribute during high-profit years, and not feel pressured to contribute during leaner years. Employees do not contribute to these accounts, only employers. Contribution limits are the lesser of $61,000 or 25% of the employee’s compensation.
Traditional IRA
A Traditional IRA or Individual Retirement Account is available to just about everyone. It is easy to set up and can incorporate 401(k) assets from previous jobs. You will likely not pay a setup cost, however, you will pay trading fees and fund expenses. Contributions are tax-deductible and earnings on principal and interest accumulate on a tax-deferred basis.
The annual contribution limit is currently $6,000 and it allows for a $1,000 catch-up contribution for participants 50+ years of age. Contributions can be made until age 70.5. Once participants reach this age, they are required to take minimum distributions (RMDs). At 59.5, you can withdraw funds with no penalties. The biggest benefit to this retirement plan, is that since income (and therefore tax rate) should be lower during the retirement years, you can defer taxes until the money is withdrawn.
Roth IRA
A Roth IRA differs from a Traditional IRA in that contributions are made after you have already paid income tax. This allows your interest to grow tax-free and allows you to contribute at any age. In order to withdraw funds, you must have reached the age of 59.5, and your account must have been established at least five prior. This is good for someone who expects his or her tax rates to be higher during retirement years.
Why retirement planning is critical for small businesses
No matter what age group you are trying to attract for your business, retirement planning needs to be a part of your benefits package. While older employees may be more concerned about having what they need to retire, younger employees are fully aware that when they retire, Social Security won’t cover their bills (if it even still exists). By offering a competitive benefits package that includes a retirement plan, you will show your existing employees that you value their service, and you will attract new talent to your organization, and have your pick of the litter.
How Do Small Business Owners Choose the Best Retirement Option For Their Business?
Giving your employees the opportunity to set up a retirement account is not only the right thing to do, but it’s also a smart business decision. With so many options, you’ll want to discuss the pros and cons of small business owner retirement strategies with a professional and decide what would be best for your small business retirement plan. Contact Las Vegas CPA Firm, Larry L. Bertsch, CPA and Associates to help you get started on the right path.
